Into a middle-income trap

Into a middle-income trap

Back in 1998, the average citizen of a middle-income country enjoyed three times the per capita gross domestic product (GDP) of the average Indian. The gap, when it came to residents of a rich country, was as high as 56 times. By 2009, the latter had narrowed to 33 times, but the distance between those living in India and middle-income countries remains stubbornly constant.

This is not to say that things are still: India has grown to be the third largest economy in Asia, and enjoys an 8%-plus growth rate, something that makes it the cynosure of the world. Yet there may be trouble brewing. The danger, to echo the words of the governor of the Mauritian central bank, is that India may be settling into a middle-income trap.

This is perhaps as dangerous a situation as a country trying to emerge from a low-income trap. In the latter case, because of the rudimentary nature of the economy, low savings and low productivity, little can be done.

India is certainly out of that situation. But if it is to move forward and join the ranks of advanced countries, it should be doing much more than it has, so far. For example, a breakdown of GDP data on the expenditure side shows that investment growth, the key to powering future growth, remains a laggard when compared with consumption growth (both private and governmental). While this is a suspicious exercise given the notorious unreliability of government data, it indicates a troubling aspect of our economy.

There are other measures, too, at the micro level, which shows our unpreparedness for the future: To cite one glaring example, a relevant one given the chronic shortages of skilled workers that India’s growing economy faces, the country is investing paltry sum on primary education, the output of which is the raw material for skilled training. Public expenditure per student as a percentage of GDP per capita peaked sometime in 2000 and has fallen consistently since then. There are other indicators that tell a similar and troubling tale.

The key here is, as always, the balance between consumption and investment. While there is no doubt that a country such as India, like any other country, cannot compress consumption beyond a certain point, the trouble is the balance remains dangerously on the consumption side. This is in marked contrast to that genuine miracle story, China.

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