Many economists have cautioned that India’s economy may face a “middle income trap,” where a country’s growth slows, and it struggles to compete with advanced economies. For the past two years, Prime Minister Narendra Modi has committed to transforming India into a high-income, developed nation by 2047. Projections suggest India is on track to become the world’s third-largest economy within six years. High-income economies, as defined by the World Bank, have a per capita Gross National Income (GNI) of $13,846 (£10,870) or more. Currently, with a per capita income of approximately $2,400 (£1,885), India falls into the lower middle-income category. Economist Ardo Hannson describes this as a situation where rising costs reduce competitiveness.
A recent World Bank report echoes these concerns. The 2024 World Development Report states that at India’s current growth rate, it will take 75 years to reach a quarter of the United States’ per capita income. The report also identifies over 100 countries, including India, China, Brazil, and South Africa, as facing significant barriers to achieving high-income status in the coming decades. Researchers analyzed data from 108 middle-income countries, responsible for 40% of global economic output and nearly two-thirds of carbon emissions. These nations are home to three-quarters of the global population and a significant portion of those living in extreme poverty.
The report highlights the challenges these countries face in overcoming the middle-income trap, such as aging populations, rising protectionism in developed economies, and the urgent need for accelerated energy transitions. “The battle for global economic prosperity will largely be won or lost in middle-income countries,” says Indermit Gill, the World Bank’s chief economist and a co-author of the study. He argues that these nations often rely on outdated strategies to advance economically, either over-relying on investment or prematurely shifting to innovation.
For instance, businesses in middle-income countries tend to grow slowly. In India, Mexico, and Peru, firms that have been operating for 40 years typically double in size, whereas, in the US, they grow sevenfold. This indicates that while firms in these countries can survive for decades, they struggle to achieve significant growth. Consequently, nearly 90% of firms in India, Peru, and Mexico have fewer than five employees, with only a small fraction employing ten or more.
Gill and his colleagues recommend a new strategy focused on increased investment, incorporating global technologies, and fostering innovation. South Korea exemplifies this approach. In 1960, South Korea’s per capita income was $1,200, rising to $33,000 by 2023. Initially, South Korea boosted both public and private investment. By the 1970s, it shifted to policies that encouraged domestic firms to adopt foreign technology and advanced production methods. Companies like Samsung transitioned from noodle-making to producing TV sets for regional markets through technology licensing from Japanese firms. This success created a demand for skilled professionals, prompting the government to invest in public universities. Today, Samsung is a global innovator and a leading smartphone manufacturer.
Countries like Poland and Chile have followed similar paths. Poland increased productivity by adopting Western European technologies, while Chile drove local innovation by encouraging technology transfer, adapting Norwegian salmon farming techniques to become a top salmon exporter.
History indicates that countries often hit a “trap” at around 10% of US GDP per capita ($8,000 today), placing them in the middle-income range. Since 1990, only 34 middle-income countries have transitioned to high-income status, with many benefiting from EU integration or oil discoveries.
Economists Raghuram Rajan and Rohit Lamba estimate that even with a robust per capita income growth rate of 4%, India’s per capita income would reach $10,000 only by 2060, lower than China’s current level. In their book, “Breaking The Mould: Reimagining India’s Economic Future,” they argue that India must do better. They emphasize the importance of leveraging the potential demographic dividend—a rising share of the working-age population—before the country experiences the challenges of an aging population. Generating good employment opportunities for the youth is crucial for accelerating growth and achieving upper middle-income status before the population starts aging. In other words, they question whether India can become prosperous before it grows old.
