India's path to becoming high-income nation: Escaping 'middle-income trap'

Five key course corrections for India to become an advanced country and set a better path for others

The World Bank’s latest World Development Report says about 108 countries* are currently stuck in a middle-income trap. It defines these as countries with a gross national income (GNI) per capita between $1,146 and $14,005 in 2024 — below this threshold, a country is considered low-income, while above it, high-income. It breaks up the middle-income category (MIC) into two sub-categories — with those between $1,146 and $ 4,515 as lower middle-income (LMIC) and above that as upper middle-income (UMIC). The number of countries in the MIC group remained high at about 90 in 2000, increasing to 109 in 2010, and remaining at 108 today. They appear to be in a trap. But this is misleading.

 

What we see is considerable movement up the income ladder — from low to LMIC, from LMIC to UMIC, and from UMIC to high income. The number of high-income countries has increased from 51 in 2000 to 85 in 2023, while the number of low-income countries has declined from 63 in 2000 to 26 in 2023. It’s not so much a trap as a gruelling climb up the development ladder. Many countries in Eastern and Southern Europe, benefitting from the assistance of European Union (EU) membership, have made it. Several East Asian countries, South Korea, Taiwan, Singapore, have also made it — with countries like China and possibly Malaysia on track to join them. Vietnam is a way away and still an LMIC but has the capability and drive to reach there. In Latin America, Chile and Uruguay have made the climb to high-income status, while several others, such as Brazil, Mexico, Peru, and Colombia, seem stuck. Some, like Argentina and Venezuela, once high-income, have fallen back to MIC status and appear trapped. Some oil- and mineral-rich countries have also made it, but many, like Iraq, Iran, Algeria, Libya, and Nigeria, appear to be struggling. 

 

The United Nations Development Programme’s (UNDP’s) Human Development Index (HDI), which measures progress not just on income but also on education and health, also shows considerable movement up the development ladder. It has four categories for human development  based on HDI scores — low (<0.55), medium (0.55-0.7), high (0.7-0.8) and very high (>0.8). In 1990, 70 countries out of 160 were classified as low HD, falling to 26 out of 185 countries by 2022. The very high HD category increased from 47 in 1990 to 69 by 2022, and the high HD increased from 18 in 1990 to 49 by 2022. These improvements in a broader development index than just income alone, show considerable movement from low to medium, then to high, and finally to the very high HD category.

 

Going through the middle-income phase appears less like a trap and more like an arduous climb. Those that come well-prepared—by building strong institutions, educating and training their people, or benefiting from luck, such as striking oil, or receiving support, like EU membership — tend to succeed.

 

Domestic and international experts have already begun speculating on whether India, an LMIC, will be stuck in a middle-income trap. Even the World Bank suggests that it will take India, with a per capita income of $2540 just 3 per cent — yes, only three — of the US per capita income, 75 years to reach a quarter of the US per capita income. However, that is hardly a fair yardstick.

 

The World Bank’s new President Ajay Banga has changed its mission to a very appropriate objective, “Eradicating Poverty on a Livable Planet.” However, if everyone were to adopt a US lifestyle, we would certainly not have a livable planet. Instead, according to the UNDP, we would need nine planets to sustain us. And a Trump victory in the US Presidential election, just announced, makes things even worse for the planet, as he will pull the US out of global climate accords and increase dependence on fossil fuels. Even China in trying to emulate the US is already the world’s largest CO2 emitter well before becoming a high-income economy. So, what should India aspire to?

 

Pointers can come from accounting for ecological damage when we measure development. The Sustainable Development Index (SDI) accounts for unsustainable development by dividing the HDI with an ecological index composed of CO2 emissions per capita and material use in production, which create ecological costs. Using this yardstick, the development scores of the US, Australia, Canada, and Singapore, among other advanced countries, drop significantly. Interestingly, the SDI peaks at about $14,000 GNI per capita and at 0.8 HDI score (see figure). This is the World Bank’s cutoff for high income and UNDP’s cut-off between high and very high HDI. These would be achievable and sustainable objectives for India to aspire to by 2047, but with a lighter carbon footprint than the countries that have reached there before.

 

India’s rise to becoming an advanced country with these objectives is not inevitable, but neither is it impossible. To achieve this, India must focus on five key course corrections, ensuring that when it reaches upper middle-income status, it will have a well-prepared ecosystem to continue its climb.

 

These course corrections are  — improved institutions of governance, public finances and decentralisation, widespread high-quality education, reduced gender disparities, increased focus on innovation and competitiveness with factor-market reforms, not just import protection and industrial policy, and reducing dependence on coal more aggressively. I will elaborate on these in a subsequent column. Quite a challenge, but a worthy one to pursue to improve the lives of 1.5 billion people in India by then. In doing so, India can not only become an advanced country but show a better path to others to follow up the development ladder on a, hopefully, livable planet.

 

* Their published date for 2023 shows 105 countries

 

The author is distinguished visiting scholar, Institute for International Economic Policy, and co-author of Unshackling India, HarperCollins India