22 February 2025 : Indian Express Editorial Analysis

1. The missing growth strategy

(Source – Indian Express, Section – The Ideas Page – Page No. – 11)

Analysis of the news:

Stagnation in the Lower Middle-Income Category

• India achieved the status of a lower middle-income country in 2007. However, despite 18 years of economic progress, it remains within this classification.
• The rise in per capita income from $1,022 to $2,700 over these years indicates significant growth.
• Yet, the target to transition into an upper-middle-income category—requiring a per capita income of $4,516—remains a challenge.
• The IMF projects India’s per capita income to reach $4,195 by 2029, suggesting that while upper-middle-income status seems attainable, it will likely not be achieved before the next decade.
• The concept of a “lower middle-income trap” arises here, implying a stagnation risk if India fails to move beyond this category within the next decade.

Regional Disparities in Income and Growth

• India’s economic landscape is marked by stark regional variations.
• The western and southern states, such as Telangana ($4,306), Karnataka ($4,021), Haryana ($3,934), and Tamil Nadu ($3,807), exhibit higher per capita incomes and are well on their way to achieving upper-middle-income status.
• Delhi, with a per capita income of $5,579, already qualifies as an upper-middle-income region.
• These states benefit from diversified economies involving sectors like IT services, automobile manufacturing, and high-end manufacturing.
  Their ability to maintain competitiveness depends on the continuous flow of capital and skilled labor, alongside government policies that foster growth.
• However, these states face the challenge of avoiding the middle-income trap, which many countries have struggled with.

The Ambitious High-Income Goal

• The Indian government’s vision of achieving high-income status, with a per capita income exceeding $10,000 within two decades, presents a formidable challenge.
• For this vision to materialize, the advanced states would need to reach high-income levels much earlier, paving the way for the rest of the country.
• However, even economic giants like China have yet to breach the high-income threshold despite decades of rapid growth.
• The success of India’s high-income ambition will depend on whether the advanced states can continue progressing without being hindered by structural and policy-related obstacles.

The Role of Industrial Diversification and Ecosystem Strengthening

• Western and southern states are pursuing diverse economic activities spanning low-cost manufacturing, high-end manufacturing, and skilled services.
• This includes sectors like apparel, automobiles, semiconductor manufacturing, and IT services.
• Government initiatives such as Production-Linked Incentives (PLIs) are further strengthening these manufacturing and services ecosystems.
• Additionally, higher value-added activities in the primary sector, like dairy and poultry farming, contribute to economic resilience.
• These developments are critical for sustaining competitiveness by attracting skilled labor and capital, thereby preventing wage inflation and capital shortages.

Challenges for Less Developed States

• For states like Bihar ($729), Chhattisgarh ($1,780), West Bengal ($1,861), and Odisha ($1,970), economic advancement poses a greater challenge.
• Lacking robust manufacturing and modern services sectors, these states face structural impediments that slow their progress toward upper-middle-income status.
• While some benefit from natural resources, long-term growth demands diversified economic bases.
• The central government’s apparent lack of focused economic initiatives for these states, despite deriving significant political support from them, raises questions about balanced national development.
• Redistribution policies alone cannot substitute for sustainable growth strategies tailored to these regions.

Dual-Level Development Challenge

India’s development conundrum operates on two levels.

• Firstly, ensuring that economically advanced states avoid the middle-income trap by transitioning to high-income levels.
• Secondly, accelerating growth in poorer states, which involves expanding economic activities across the entire value chain.
• This dual approach demands nuanced policymaking that fosters both low and high-value-added sectors, ensuring inclusive growth across the country.

The Policy Imperative: Choices for the Future

The path forward depends significantly on the policy choices made by the central government. Key questions include:

• Will India pursue freer trade policies or continue with protectionism?
• Will the government persist with the “national champions” strategy, potentially stifling broader entrepreneurial growth?
• Can the necessary institutions be developed and nurtured to sustain high growth rates?
• How will political dynamics, especially the disconnect between economic and political power, affect economic policymaking?

These policy decisions will determine whether India can sustain its growth momentum and avoid the pitfalls that have historically plagued other developing economies.

Sustaining Growth and Avoiding the Middle-Income Trap

• While India’s economy has demonstrated resilience, maintaining an average growth rate of 6% over three decades, sustaining or accelerating this growth is not guaranteed.
• Achieving the 8% growth trajectory necessary for high-income status will require comprehensive and well-thought-out economic policies.
• Historical precedents show that many nations have stumbled at this critical juncture, failing to transition from upper-middle-income to high-income levels.
• Thus, avoiding the middle-income trap will depend on sound governance, strategic policymaking, and institutional strength.

Conclusion

• India’s journey to high-income status hinges on two key challenges: enabling western and southern states to avoid the middle-income trap and accelerating growth in poorer states.
• Achieving this will require strategic policies, institutional reforms, and balanced regional development.
• Success depends on sustaining high growth rates, fostering industrial diversification, and overcoming political and structural hurdles.