The World Bank’s latest report warns that India could be one of the 100 countries that are likely to fall into the middle-income trap if it does not play its cards well. The World Bank classifies countries with annual GDP per capita in the range of $1,136 to $13,845 as middle-income countries. India with a per capita GDP of $2,500 is way below the upper threshold of the category. Therefore, the risk of being trapped in the mid-income band appears much greater for the country, which has already started seeing its fertility rate falling and the young population shrinking compared to older people. What adds to India’s challenge is the risk of climate change, which is now much more palpable than a decade ago.
India needs to keep growing in dollar terms at a nominal rate of 8% till 2047 if it wants to break free from the so-called middle-income trap. And, it will have to keep doing it amid growing geopolitical tensions, an inward looking world where globalisation continues to face challenges, and climate changes keep posing new threats to the existing model of growth. Why is the task difficult? India grew its economy in dollar terms at around 9% nominal rate during the previous 25 years. To maintain almost the same rate of growth with a higher base for the next 25 years needs something special.
The World Bank report talks about 3I strategy—investment, infusion and innovation. India has reached a stage where the first 2I’s—investment and infusion (of foreign technology to grow industry)—may no longer generate the kind of return they did in the last 20-25 years. It now needs to bring in the innovation factor to break the shackles. South Korea, as the World Bank report points out, did well in all the 3is.
For innovation, it spent generously to help public universities develop skill sets needed for the next phase of growth. For India to ensure it does not fall into that trap, it must promote innovation in the economy. And that calls for proper ground work. India entered a low middle income country in 2007, and it continues to do so. It must now invest heavily in education, build great institutions, and remove barriers for new ideas to leapfrog to the next level.