Middle-Income Trap and India’s Challenges

The World Bank’s report highlights the “middle-income” trap, where growth slows down as incomes increase.
• The report suggests that only 34 middle-income economies have transitioned to higher income levels in the last 34 years.
• The report emphasizes the importance of the “3i” approach: investment, infusion, and innovation.

Role of the State
• Countries that broke the middle-income trap were part of the European Union, which facilitated growth and mobility of capital and labor.
• South Korea and Chile were examples of countries that managed to escape the trap, demonstrating the importance of state intervention.
• The South Korean government’s approach carries lessons for India, emphasizing the need for state neutrality, performance-based benefits, and innovation.

Potential Pitfalls
• The success of South Korea’s strategy was built on manufacturing exports, which is not feasible in today’s economic scenario.
• World export growth has slowed, and demand from large economies has slowed down.
• The employment losses in developed economies due to free trade have made it harder for countries like India to access foreign markets.
• Premature deindustrialisation has reduced the income share of manufacturing at lower levels of GDP.

Challenges Faced by India
• The power of billionaires in the Indian economy has increased, and the state is unable to ensure high rates of domestic capital investment.
• The manufacturing sector has stagnated, and the process of structural transformation has reverted.
• The growth of the aggregate economy is not reflecting on the ground, with nominal wages for regular wage workers only growing at around 5% and that of casual workers at roughly 7%.
• The question of democracy is looming large, as seen in South Korea and Chile.