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Mains Test Series

Urbanization, their problems and their remedies.

Q. Do you think that India has overcome the Middle-Income trap? Justify your view.

Introduction: A middle-income trap is a situation in which a country attains a certain average income, gets stuck at that middle-income level, and cannot transition to a high-income level. 

World Bank defines a middle-income country as one with a Gross national income(GNI) per capita of $1000-12000 at constant 2011 prices. 

India’s Susceptibility to Middle Income Trap:  

  1. Heavy reliance on the Primary sector: structural transformation from primary to secondary to tertiary sector is crucial for becoming a high economy. However, approximately 45% of India’s population still depends on the primary sector.
  2. Climate Change: Weather extremities have become a recurrent phenomenon, posing a serious threat to Indian agriculture, which is heavily dependent on monsoons. Moreover, climate-related disasters might consume considerable resources.
  3. Red-Tapism: There is still a lot of state control in place. Factors like retrospective taxation and lack of stable policies have curtailed the growth of the private sector and impacted investment in the economy.
  4. Human Capital Formation: The stock of highly skilled human capital is also lacking in India. The quality of education in school and college is not on par with international standards. 50% of Graduates are not employable, according to CII’s India skills report.
  5. Domestic market Orientation: India is a consumption-based economy rather than export-based or production-based. This leaves India in a perennial Trade deficit.
  6. Technology deficit: India aspires to be a technology-based economy. However, India spends only 0.6% of GDP on Research and Development, which is relatively low compared to other major economies at 1.5% to 3%.

To avoid becoming trapped without a viable high-growth strategy, India needs to: 

Steps required to be taken to escape the middle-income trap:  

Escaping the middle-income trap requires identifying strategies to introduce new processes & find new markets to maintain export growth. 

  1. Reforms in Labour laws: As per the Annual Survey of Industries 2017-18, nearly 47% of companies in India employed less than 20 workers. The labour laws have created incentives for firms to remain small and uncompetitive. The new labour code, once implemented, would increase the threshold relating to layoffs and retrenchment in industrial establishments to 300 workers.  
  1. Focus on Technology-intensive sectors: India must also focus on improving

‘within sector’ productivity through R&D investments, better management practices and adoption of new technologies to create high-margin businesses.   

  1. Export orientation: According to the World Bank data, high-tech exports accounted for only 10.3% of India’s manufacturing exports in 2019, only a marginal improvement over its share of 9.7% in 2009.
  2. Full convertibility: To become a truly global economy, India must look forward to allowing full capital account convertibility. This would bring more investment into India and can lead to better growth.  
  3. New Age-Skill development: In sectors like communication, designing, computing, cyber security, data processing, and artificial Intelligence, much more focus is needed to build a workforce for the future economy.
  4. Increasing domestic demand: because an increasing middle class can use its increasing purchasing power to buy quality, innovative products to help drive economic growth.
  5. Decentralisation for effective governance: Local government should have greater powers to ensure speedier decision-making. This will provide more inclusive growth.

Conclusion:  

Focus on growth is essential to push India towards a better growth path. For this, ease of doing business, such as lighter regulations, labour code, easy credit, easy exit, etc., are necessary. Further, human development is an inevitable requirement for building an economy for the future. 

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