Pursue steady energy transition, market competitiveness for developed status: World Bank tells emerging economies

New Delhi: Middle-income countries, including India, must navigate a complex set of challenges to ascend to high-income status, the World Bank asserted in its latest report. The World Development Report 2024: Economic Growth in Middle-Income Countries outlines the critical steps needed, such as engineering a steady energy transition, maintaining competitive markets, and promoting economic equality.

India, currently classified as a lower-middle-income country, is striving to achieve developed economy status by 2047 under Prime Minister Narendra Modi's leadership. The report emphasizes the need for large middle-income nations like China, India, and Indonesia to grow while transitioning their energy systems away from coal. This shift is essential for supporting new job creation, fostering innovation, and enhancing production and trade.

The report highlighted the disruptive nature of decarbonization for carbon-intensive industries and regions.

"Just as coal, oil, and natural gas have shaped economic geography, the low-carbon transition is altering patterns of comparative advantage and the drivers of growth and structural transformation in middle-income countries. This implies that the path to high-income status in the 2020s will most likely differ from that of the past, with the potential need for updating policies," the World Bank said in the report.

Balancing growth and sustainability

India has set ambitious targets, including achieving 500 GW of non-fossil fuel energy capacity by 2030 and reaching net-zero emission target by 2070. However, the country remains heavily dependent on fossil fuels, with government data indicating a 2.44% increase in fossil fuel-based power generation capacity to 243.22 GW in FY24. In contrast, non-fossil fuel capacity, mainly from renewable sources, rose by 10.79% to 190.57 GW during the same period.

The World Bank report has urged countries like Brazil, China, India, and the Philippines to prioritize regulatory adjustments that enable a transition from imitation to innovation. It said that introducing market contestability and exploring policy complementarities are vital for sectors where economies of scale and co-location of economic activities drive innovation, such as urban agglomerations and special economic zones.

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The report compared micro-enterprises in the US, India, and Mexico, noting that establishments with over 100 employees in America account for about three-fourths of employment. In contrast, the prevalence of small-scale entrepreneurship in India and Mexico signals low-productivity entrepreneurs focusing on subsistence.

Beyond Jugaad: The need for capital deepening

The World Bank cautioned against the "jugaad" mindset—improvisation with limited resources—that has characterized India's development. 

The report calls for capital deepening, or increasing the capital-labour ratio, as crucial for advancing beyond low levels of development. 

"Consider India in the 1980s, where capital deepening was key to improving growth—in the absence of capital, enterprises and families made use of technologies that were neither new to the country nor new to the world. The Indian term jugaad became synonymous for tinkering with limited capital, often in ways that were illegal," the report said.

"But jugaad with scarce capital can only take a country so far—capital deepening is urgently needed at low levels of development," it added.

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Indermit Gill, chief economist, World Bank Group, underscored the importance of a fresh approach that balances investment, technological infusion, and innovation. 

"The battle for global economic prosperity will largely be won or lost in middle-income countries," he noted. Gill emphasized the need for these countries to avoid over-reliance on outdated strategies and to adapt to current demographic, ecological, and geopolitical pressures.

The report also highlighted that 31 middle-income countries transitioned to high-income status between 1990 and 2019. Of these, 10 countries, including Hungary and Poland, benefited from joining the European Union, while others like Kuwait and Saudi Arabia capitalized on natural resources and timely policy reforms during periods of high commodity prices, it said.