Growth challenges

Global prospects have worsened in recent years

One of the biggest risks for developing economies in their development journey is getting stuck at the middle-income level, or what economists call the middle-income trap. A new study by the World Bank — released last week — highlighted the challenge. It marked 108 nations, including major economies like China, India, South Africa, Brazil, and Vietnam, with per capita income ranging between $1,136 and $13,845 as middle-income countries striving to attain high-income status within the next two or three decades. However, World Bank economists have cautioned these countries, which comprise 40 per cent of global economic activity, highlighting that their economic growth trajectories are not accelerating as expected but slowing as income levels rise.
 

According to World Bank estimates — based on the Solow-Swan growth model — most middle-income countries are anticipated to face a marked economic slowdown between 2024 and 2100. This model indicates that development strategies heavily reliant on capital accumulation, which were effective during the low-income and even the lower-middle-income phases, are now yielding diminishing returns. As the marginal productivity of capital declines, reliance on factor accumulation alone is likely to result in progressively poorer outcomes. Furthermore, in the first two decades of this century, growth in average annual income in these countries declined by almost one-third, dropping from 5 per cent in the 2000s to 3.5 per cent in the 2010s. A swift recovery appears unlikely because middle-income countries will likely encounter strong headwinds, including escalating geopolitical tensions, rising protectionism, public debt restricting government intervention, an ageing population, and additional expenses for energy transition and climate finance.
 

The underlying findings of the study highlight the challenges India is likely to face in attaining the goal of becoming a developed economy by 2047. According to the World Bank, India, with a per capita gross domestic product of $2,484.8 in 2023, is classified within the lower-middle income bracket. Despite being the fastest-growing major economy, if current trends persist, it will take 75 years for India’s per capita income to reach even a quarter of the levels observed in the United States. This projection underscores India’s formidable challenges in its quest for economic advancement and highlights the necessity for strategic reforms to ensure enduring growth.
 

For India to achieve its 2047 goals, a substantial shift in the trajectory is imperative, necessitating profound economic, social, and structural transformations. Sustainable growth can be maintained only if outdated strategies and models are consistently replaced with innovative and updated approaches that yield higher productivity and returns. This can ensure that growth is not only rapid but also resilient and adaptable to changing global conditions. Notably, the study has further suggested a three-phase approach — investment, infusion, and innovation-driven growth to tackle the trap. The successful experience of Chile, the Republic of Korea, and Poland demonstrates the effectiveness of this “3I” strategy. Some of the recent reforms in India have been in the right direction, but it needs bold steps to address structural issues that are likely to affect growth in the medium to long run. These will include promoting private investment in a big way, developing a growth model that is sensitive to climate change, bridging the employment-skilling gap, and integrating more deeply into global value chains. India needs to use its demographic advantage by ushering in the next generation of reform in all areas, including the basic functioning of the Indian state.