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Business News/ Opinion / Views/  Opinion | The middle income trap that India must avert

Opinion | The middle income trap that India must avert

A top economic adviser has flagged the risk of stagnation that lack of inclusive growth could cause. We must reduce inequality and help everyone achieve upward mobility


The warning by Rathin Roy, a member of an economic panel advising Prime Minister Narendra Modi, that India could be headed for a “structural crisis" has sparked a debate on whether the economy’s days of high single-digit growth rates are a thing of the past. According to Roy, India’s growth has mostly been driven by demand generated by 100 million-odd people at the top of the country’s socio-economic pyramid. But that demand has begun to exhaust itself, and so India could slip into a “middle-income trap". This is a risk that emerging economies are said to be vulnerable to. As a country runs out of new sources of growth after an initial burst of rapid expansion, it finds itself unable to break into a higher-income league. In India right now, the relatively weak offtake of everything, from cars and apartments to suds and toothbrushes, points to a slowdown in consumption. But is this temporary, or a sign of early market saturation?

Wealth inequality and the hierarchical distribution of income in developing countries has long been identified as a growth barrier. The greater the gaps between strata, by this analysis, the slower the upward mobility of families that are at lower levels. Such economies typically experience lopsided expansion, with the positive fallout of an economic boom on top often failing to reach those below. Sustaining growth requires the mass mobilization of financial as well as human resources, and if inequality is acute, the latter tend to come up short. This phenomenon is exemplified by Brazil and South Africa, among a few others. These countries increased their economic output at a fast clip for several years at a stretch, but large sections of their population did not see their lives get better. They got left behind. India appears to have undergone something similar. Opening up to global capital in the early 1990s gave the economy a big boost, transforming upper-crust and middle-class lifestyles beyond recognition. Their prosperity also generated enough demand for goods and services for India’s have-nots to get slightly better off, and it’s clear that poverty levels did fall. Yet, growth impulses seem to have flagged and the economy’s incline has flattened out.

To the extent that India’s policy mix is to blame, it’s likely that reforms can help the economy regain pace and achieve its potential. However, the wider risk of a middle-income trap should not be dismissed. The Economic Survey2017-18 saw a shift in resources from low to high productivity sectors and robust exports as growth aids. Both are related, since production competitiveness tends to spur exports as well. The best insurance against the risk of slipping into a middle-income trap, however, would be to address mobility restraints at lower levels of the socio-economic pyramid. This would mean sharply upping the quality of healthcare, education and skill development for the deprived masses. These are long-gestation projects, as it were, and the results could take decades. But the economy needs to rise as a whole, not in parts. In the interim, policymakers must not use the trap story as an excuse for poor near-term growth. The country should do all it can for a badly needed uptick. Failure at this stage could leave India stagnant in a lower middle-income bracket, even as China strives to catch up with and overtake the US. If this is to be an “Asian century", India must stay in the reckoning.

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Published: 12 May 2019, 07:46 PM IST
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