The World Bank classifies countries based on their position on the economic ladder. The latest results of this annual exercise were released earlier this month. It quietly re-ordered the Asian development map.
Three countries have been upgraded to upper middle-income status: Vietnam, the Philippines and Sri Lanka. China is now on the cusp of becoming a high-income country.
There are four groups into which countries are classified according to their per capita income: low-income, lower middle- income, upper middle-income and high-income.
What about India? It continues to be classified as a lower middle-income country. Its current rate of economic expansion should take it into the next category of upper middle-income countries in the next few years.
However, underlying the move up the economic ladder are important structural changes that need wider airing in the national discourse.
Higher incomes come from higher productivity, which in turn depends on basic questions of what work we do, how many of us are working, where we live and who employs us.
The fourth question is given less importance than the other three questions, although it is important to track an emerging economy’s transition from working on farms to working in factories or offices, apart from the labour force participation rate, especially of women, and the movement of people from villages to cities.
The question of who employs us is also important in an analysis of India’s economic development; more specifically, the path to high-income status or Viksit Bharat. Here are some useful numbers.
Data from countries across the world shows that more developed countries have fewer people who are self-employed. Look at the chart on this page. It shows how the proportion of self-employed in the total workforce declines sharply as countries move from one class of countries to another.
This also means that workers increasingly get employed by firms rather than working in household enterprises, both on farms as well as elsewhere. The creation, growth and exit of firms is thus central to the development process.
Look at the employment situation in some specific countries as well. About 75% of the Indian labour force is self-employed. Compare that with data for the three Asian countries that have just been promoted into the upper middle-income club: Vietnam (53.3%), the Philippines (36.1%) and Sri Lanka (42.1).
Each of them has a significantly smaller part of its labour force working on its own. As for China, only 37% of its labour force is self- employed. Only a part of the difference can be explained by the higher proportion of Indians working in agriculture. In other words, India faces a far deeper structural challenge.
The upshot: a country’s move up the development ladder all the way to high-income status necessarily means a shift from self-employment to paid employment.
The idea that India can progress through tiny household enterprises that employ no outside labour or through millions of jobs in the gig economy flies in the face of international experience. The problem can be divided into three parts, in terms of the type of employer.
First, the dominance of large enterprises. India’s formal job problem is, in large part, a large-firm problem—the country has too few big companies relative to its population, and the ones it has are too capital-intensive to absorb workers at scale.
Policy has to maintain a balance between actively cultivating scale and preventing the concentration of economic power. Lower import tariffs are one way to do that.
Predictable land and labour rules, faster contract enforcement and production-linked incentives that reward employment intensity, not just output, will also help. China and Vietnam built their job booms on the back of large, export-oriented manufacturers.
India needs its own cohort of 50,000-plus-worker firms, and that means removing the regulatory penalty that currently kicks in the moment a firm crosses a line in the ‘large’ category—which pushes owners to keep their businesses small on purpose.
Second, lack of an Indian Mittelstand. Germany’s postwar economic miracle wasn’t built by giants alone, but by a deep layer of mid-sized, often family-owned, export-competitive firms—the Mittelstand—that employed millions and dominated global niches.
India has almost no equivalent tier: its firm-size distribution collapses straight from micro to a handful of conglomerates, with almost nothing solid in between.
Building this middle requires patient capital (not just working-capital loans), sector-specific technical upgradation, and export support tailored to firms with 100–1,000 workers—not the informal micro unit, nor the listed giant. This missing middle arguably creates India’s single biggest structural jobs gap.
Third, slow scaling up of very small businesses. The vast majority of enterprises in India are proprietorships with fewer than five workers, trapped there by their weak access to credit, technology and markets, rather than by choice. Formalization incentives alone won’t fix this.
For example, GST registration without a growth pathway just adds compliance cost.
What would work is bundling, be it credit linked to formal payrolls, market access through digital public infrastructure such as India’s Open Network for Digital Commerce, and cluster-based upgradation (shared testing facilities, design support, aggregated export orders, etc) that lets tiny firms behave like bigger ones without needing to become one overnight.
Scaling the smallest firms, even partially, could do more for aggregate job creation than any single large-firm policy.
India needs to do a lot on all three fronts.