India & The Middle Income Trap

In order to understand the middle income trap, we need to first understand what is a middle-income economy. Based on the Gross national Income per capita, the World Bank classifies economies into the following broad categories:

The GNI per Capita Thresholds for the purpose of economy classification and that of the United States of America, United Kingdom, China and India are depicted in the graph:

What is the Middle Income Trap?

It has been seen that countries in the low -income economy bracket, experience a rapid growth but as they reach the middle-income economy bracket, their growth stagnates and they are not able to move to a high-income economy bracket.

Countries such as Argentina, Brazil, Mexico, Russia and South Africa have stayed ‘trapped’ for a long time in the upper middle-income category. China, with a GNI per capita of around $9,800, now in this group, was most likely to get out of the middle income trap, but it is now difficult to break through the trap because of the COVID-19 pandemic.

Will India get “Trapped”?

The Economic survey of India has highlighted the possibility of India getting into a middle income trap. The challenges that led India to the possibility of getting into this trap are:

Ways that India can avoid the middle income trap are:

1. Improve agricultural productivity.
2. Improvement in human capital.
3. Favourable relations with other countries with the help of FTAs, bilateral agreements, multilateral agreements, etc.
4. Boosting private investment.
5. Boosting domestic consumption through measures such as reduction in GST rates, higher employment creation, universal basic income, lower personal Income Tax rates etc.
6. Innovation to boost technical know-how.
7. Implementing land and labour reforms.