BT India@100: What will it take us to address the middle-income trap?

The middle-income trap is a pressing concern for India as it strives to become a developed nation by 2047. This economic phenomenon, where a country experiences stagnation after reaching middle-income status, poses a significant challenge to India's ambitions.

NITI Aayog, the government’s think tank, emphasizes the importance of sustained high growth rates to break free from this trap. It envisions a "Viksit Bharat" where India's per capita income reaches levels comparable to high-income countries, requiring a ninefold increase in GDP and an eightfold rise in per capita income over the coming decades.

Recent discussions around the middle-income trap have been fueled by a World Bank study that highlights the daunting timelines emerging economies like India face if they continue on their current paths. The World Bank's 2024 World Development Report paints a grim picture, suggesting it could take India 75 years to reach just a quarter of the U.S. per capita income if significant policy shifts are not made. The report proposes a new "3i" strategy—Investment, Infusion, and Innovation—as a way to break free from this economic stagnation. These strategies call for a shift from traditional methods, urging countries like India to embrace advanced technologies and foster innovation more aggressively.

However, the debate on how to achieve this growth is ongoing. Former RBI Governor Raghuram Rajan has sparked discussions on whether India should pivot entirely to a services-led economy, given the sector’s substantial contribution to GDP. Meanwhile, the World Bank's perspective is more holistic, advocating for a balanced approach that does not pit manufacturing against services but sees both as essential drivers of economic growth.

Investment in high-tech areas, such as semiconductor manufacturing, is crucial, as is the infusion of cutting-edge technology across the economy. India’s recent efforts to attract foreign investment in these sectors align with the World Bank’s recommendations. However, the third pillar of the 3i strategy—innovation—remains a weak spot. While India has made strides in digitalization, exemplified by the success of the United Payments Interface (UPI), it still lags behind in areas like research and development and cutting-edge technologies like artificial intelligence.

Dr. Arvind Panagariya, Chairman of the 16th Finance Commission of India, will delve into these issues at the "Adani BT India@100" forum on August 20 at the Leaders Lounge, Bharat Mandapam in New Delhi. As one of the key speakers, he is expected to provide insights into how India can navigate the middle-income trap and chart a course toward becoming an economic powerhouse by 2047.

The middle-income trap is not insurmountable. Countries like South Korea have successfully transitioned to high-income status by adopting robust innovation strategies and integrating advanced technologies. India must now decide how to enhance its policy approach, particularly in research and development, to ensure that it does not merely follow but leads on the global stage. NITI Aayog’s vision of a "Viksit Bharat" hinges on India’s ability to sustain high growth rates and embrace innovation at an unprecedented scale, steering the nation clear of the middle-income trap and toward a prosperous future.

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