Risk of India falling into middle-income trap is low

India may not get caught up in the middle-income trap as its growth momentum is unlikely to slow down, but it will have to continue with its policies and reforms to transform into a high-income country, said Auguste Tano Kouamé, World Bank's Country Director in India.

“I don’t think the middle-income trap is a risk for India…For India, the risk has decreased,” Kouamé said on Tuesday, pointing out that the Indian economy has been dynamic in the past few years. He also underlined that India’s has been a story of success despite adversity.

He was responding to a question on the recent World Bank study that had warned that over 100 countries—including China, India, Brazil, and South Africa—face serious obstacles that could hinder their efforts to become high-income countries in the next few decades.

Kouamé said that he does not expect India’s growth to slow down and said India will move to a high middle-income country soon and from there it will move to a high-income country. He, however, said that it is difficult to give a timeline for this and underlined that the assumption is based on the theory that policies and reforms will continue.

He noted that there generally tends to be a trap for middle-income countries as the level of effort they put in needs to increase as they go along.

India hopes to be a developed nation or Viksit Bharat by 2047. As of 2023, India was classified as a lower- middle-income country.

The World Bank on Tuesday also upped India’s GDP growth forecast to 7$ for the current fiscal from its previous forecast of 6.6%.

“Amid challenging external conditions, the World Bank expects India’s medium-term outlook to remain positive. Growth is forecast to reach 7 percent in FY24/25 and remain strong in FY25/26 and FY26/27,”it said in the India Development Update. The economy grew by 8.2% in 2023-24 and by 6.7% in the first quarter of the current fiscal.

The report also highlighted the critical role of trade for boosting growth. While there are several opportunities for India, it however, noted that tariff and non-tariff barriers have increased and could limit the potential for trade-focused investments. It has called for a three-pronged approach towards achieving the $1 trillion merchandise export target by reducing trade costs further, lowering trade barriers, and deepening trade integration.

“With rising costs of production and declining productivity, India’s share in global apparel exports has declined from 4% in 2018 to 3% in 2022,” said Nora Dihel and Ran Li, Senior Economists, co-authors of the report. 

“To create more trade-related jobs, India can integrate more deeply into global value chains which will also create opportunities for innovation and productivity growth,” she further said.