Can India avoid middle-income trap?
If you earn Rs 25,000 or more in a month, you belong to the top 10% of wage earners, a recent study mandated by the Economic Advisory Council to the Prime Minister (EAC-PM) showed. This may come as a surprise to many who see India as a big market for their goods and services. But it also explains many things including why there are so few income-tax payers in India and also the country’s floundering consumption story.
A few years ago, a top economist from EAC-PM also flagged the issue when he pointed out that India’s growth was mostly driven by the demand generated by 100 million people at the top of the socio-economic ladder, and that demand had begun to reach a saturation point. He had warned that if the situation does not improve, India may fall into the middle-income trap. The study mandated by the PM’s economic advisory council throws up a more uncomfortable truth. The top 1% accounted for almost 7% of the total wages earned in 2019–20, and the top 10% for 33% of the income earned. The bottom 50% accounted for only 22%. That is not all—the income of the top 1% grew by 15%, the top 10% by 8.1% and the bottom 50% by 3.9% in the previous three years.
The income disparity could only have worsened in the past two years of the pandemic, which saw large-scale job losses, especially in the lower rung of the jobs ladder. It looks like the much-touted demographic dividend never paid off in India. On the contrary, it looks like the country is heading towards a demographic disaster. Recently, a top official at a think tank admitted that despite all the efforts by successive governments to push manufacturing in the country, it has not necessarily resulted in the kind of jobs creation that the country needs.
The EAC-PM study suggests a number of measures that mean enhanced government interventions—higher minimum income, urban jobs guarantee scheme and universal basic income. There is a greater realisation now, even within the government, that free-market policies alone are not enough for an inclusive growth in India and that the Centre cannot wash its hands of the responsibility of supporting the vulnerable sections.