Can India break into high-income league by 2047?

Surprise! The United Nations classifies them as merely “developing", along with 123 other countries, including India, which currently has a GNI per capita of $2,170. Only 37 countries make it to its list of “developed" economies and another 17 are designated as “economies in transition".

GNI is gross domestic product (GDP) plus factor income (wages, interests, profits, etc.) received from foreign countries, minus factor income paid to foreign countries.

Indians now have a collective ambition. Prime Minister Narendra Modi, during his speech on the 75th anniversary of Independence Day, set a goal of making India viksit (developed) by her 100th anniversary.

In this pursuit, the World Bank’s pecking order could be more useful.

The Bank’s categorization—low, lower-middle, upper-middle and high income based on GNI per capita—is more straightforward. As countries of the same income group usually exhibit similar trends on education, health, or governance, given a strong correlation between income and human development, such a classification is useful beyond economic analyses as well.

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As of 2021-22, a country with GNI per capita greater than $13,205 is categorized as high income; between $13,205 and $4,256 is upper-middle income; between $4,255 and $1,086 is lower-middle income; less than $1,086 is low income.

But this is not how the world would look in 2047. The assumption is that the standard of living across the world would inch up over the next 25 years. Our extrapolation suggests that in 2046-47, a country with GNI per capita greater than $18,079 could be categorized as high income; between $18,079 and $5,813 could be upper-middle; $5,812-$1,501 lower-middle while less than $1,501 bracketed as low income.

India is presently a lower-middle income country. So, just how ambitious is our collective target?

Three scenarios

Since the 50th independence anniversary in 1997, India’s GDP in rupees has grown at an annualized rate of about 12% and 6%, using current and constant prices, respectively. GDP per capita (current prices) has increased more than ten-fold–from ₹14,500 to ₹170,000–as per the International Monetary Fund (IMF), during this period.

With GDP growing significantly during the last 25 years, GNI also showed a proportionate growth during this period. In US dollars, GNI (current prices) grew at an annualized rate of 8.5%; GNI per capita increased five times, from $400 to $2,170.

The gap between the growth rates of GNI (current prices, $) and GDP (current prices, ₹) largely reflects the impact of exchange rate. Please note that the Indian rupee has fallen roughly 50% against the US dollar during this period, from 35.9 in April 1997 to 75.8 in March 2022.

India’s current GNI per capita of $2,170 is halfway from the next threshold of upper-middle income ($4,256).

Here’s a look at the country’s income trajectory, thus far.

India took a decade (from 2008-09 to 2018-19) to double its income from $1,000 to $2,010, before it chipped off a bit during the pandemic. The income growth was even faster in the 2000s—income grew from $520 to $1,000 in just five years (from 2003-04 to 2008-09). 2008-09 is also when India shed the tag of “low income", after crossing the World Bank’s upper threshold of $975 for the category in that year.

So, can India jump two thresholds–of upper-middle and high income–in the next 25 years?

To this end, Mint undertook a forecast exercise. To keep it simple, we did not include the impact of inflation and exchange rates, as done in the World Bank’s Atlas method. The GNI (current prices, $), from 2022-23 onwards, was assumed to grow at different rates for three scenarios, and was divided by the UN’s projected mid-year population of the given year to calculate per capita figures. The income thresholds were revised at the compound annual growth rate (CAGR) of the last 25 years.

The first scenario assumes India’s GNI, for the next 25 years, to grow at the CAGR of 8.5% or the growth rate of the past 25 years. At this rate, India would become an upper-middle income nation by 2033-34. However, at $14,041, its GNI per capita would fall short of the high-income threshold of $18,079 in 2046-47 (see Chart 1a).

The second scenario adds one more caveat. It assumes GNI to grow at a CAGR of 8% during the rest of 2020s, closer to its growth rate of 7.5% between 2010-11 and 2019-20. And as the size of the economy grows, GNI growth is assumed to slow down to 6% in the 2030s and 4% in the 2040s—typical of several middle-income countries such as Brazil and South Africa. Expectedly, the high-income threshold is even more elusive under such a prospect. India could get caught up in the middle-income trap with its income not even reaching $8,000 by 2046-47 (see Chart 1b).

The third scenario is the most optimistic one, and assumes GNI to grow at a CAGR of 10% for the next 25 years. If India somehow manages such a strike rate, it would attain the high-income status in 2045-46, a year before the centenary year of independence. The minimum required GNI growth rate is 8.9% for India to touch the high-income threshold by 2046-47.

India need not maintain a consistent 10% nominal growth rate every year, but has to record it only on an overall-basis. In the period between 2000-01 and 2010-11, India’s GNI grew at an annualized rate of 12.4% while seeing a minimum of 2.8% and the maximum of 19.8%. The question is if India can repeat the spectacular performance of the 2000s, with its economy having grown multifold since then.

Wealthier world

World Bank data shows that India’s transition during the last 25 years overlapped with a larger global transition. Of the 168 countries for which figures are available for the period, the number of low-income countries declined from 57 to 20 between 1996-97 and 2021-22. While there was a significant increase in the number of high and upper-middle income countries, the share of lower-middle income countries stayed the same (see Chart 2).

A few countries, China being the most prominent example here, changed their status from low to upper-middle income. Eastern European nations—Lithuania, Latvia and Romania—saw an income increase of seven-nine times and jumped two thresholds, moving from lower-middle to high income groups. India is hoping to do the same in the next 25 years.

The average global per capita income rose more than twice during this period, from $5,523 to $12,070, moving closer to the high-income threshold. This shows that inter-nation inequality has increased over years. China’s per capita GNI (current prices, $) increased more than 18 times, fuelled partly by appreciation of its currency but largely by the 8.5% plus GDP growth rate it sustained during the period.

Nevertheless, the global economy was under pressure even before the covid-19 pandemic because of growing trade barriers and other macroeconomic strains across markets. More recently, supply-chain disruptions and geopolitical tensions have complicated the global— and India’s—growth story.

In the last decade, even smaller countries like Vietnam and Bangladesh, whose per capita incomes were lower than India in 1996-97, have sailed past (see Chart 3).

However, economists caution against such comparisons. “These countries are too small to be compared with India. We need to look at countries with similar size of population and economic structure. These two countries are far inferior to us in terms of economic structures and sophistication," said Madan Sabnavis, chief economist at Bank of Baroda.

Decade of slowdown

Economists do agree that the slowdown of the last decade continues to haunt India even today.India’s real GDP growth slowed from 7% in the 2000s (CAGR for 2001-02 to 2010-11) to 6.4% in the 2010s (CAGR for 2010-11 to 2019-20).

Lekha Chakraborty, professor, National Institute of Public Finance and Policy, said that the deviation of growth from the trend path is no longer cyclical, but a permanent “scar". Why so?

Chakraborty attributes it to the lack of proper structural reforms. “The fiscal consolidation path through expenditure compression rather than tax buoyancy affected growth," she said. “GDP growth is now relatively private-consumption led than through gross capital formation," she added.

Sabnavis thinks neglecting agriculture was a major miss of the last decade, and it should have been made more commercial.

Arvind Subramanian and Josh Felman, in their paper in 2019, attributed the slowdown to “the stress in banks and non-banking financial companies on the financial side, and infrastructure and real estate companies on the corporate side", calling it a Four Balance Sheet challenge.

Covid-19 next proved to be a major blow.

While India is slated to grow at closer to 7% until 2027-28, making it one of the fastest growing economies as per the IMF, the growth rate is a more modest 5.4% compared to pre-pandemic levels.

The target year for India becoming a $5-trillion economy has also been pushed back from 2024-25 to 2026-27. Not just that, the Reserve Bank of India (RBI), in its Report on Currency and Finance, released in April this year, estimated that India will only be able to overcome its output losses due to the pandemic in 2034-35.

Amrit Kaal for economy?

Be that as it may, many experts remain bullish on the Indian economy. However, the growth trajectory in the coming years could be punctuated with both old and new challenges.

The old ones, first.

A revival in private sector investment is strongly desired, which has been lukewarm for more than a decade now. This investment is linked to creation of jobs and a virtuous cycle of demand, leading to more production, and thereby even more jobs.

“Labour force participation rates in India are low by global standards, and especially for women. A big challenge will be to create conditions for the emergence of a few million formal enterprises over the next decade to absorb excess labour. Neither government social security programmes, nor a few big corporations, nor tiny informal enterprises can crack the challenge of creating quality jobs," said Niranjan Rajadhyaksha, CEO and senior fellow, Artha India Research Advisors.

In the last two decades, the female labour force participation rate has dropped by 12 percentage points to 19% in 2021.

“The “feminisation U" phenomenon (which hypothesizes a decline and then a rise in female labour force participation in the development process) is possible through clear public policies like gender budgeting and care economy infrastructure," said Chakraborty.

What could be the new challenges?

Global trade has slowed. Therefore, exports might slow, going ahead. Meanwhile, not everyone approves of growing protectionism—India has resorted to import substitution in many sectors through tariff hikes. But these moves can backfire.

“There is a shuffling of market shares within global trade, as countries try to reduce their dependence on China, which is a huge opportunity for India," Rajadhyaksha said. But high import tariffs are, in effect, a tax on exports, he added. In many sectors such as electronics, Indian companies mostly assemble products rather than manufacture. The components used still have to be imported.

Puja Mehra, author of The Lost Decade (2008-18), outlined the desired trade policy: India needs predictable and stable trade policies and tariffs that promote competitiveness. Also, strategic self-sufficiency, such as in semiconductors.

Yet another challenge could be climate shock, which can pound India’s vast agriculture sector, pushing millions into poverty. A low carbon path would be key to hedge such future risks.

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