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Congress says Modi govt leading India into 'middle-income trap': What is it?

In its Real State of the Economy report, Congress has accused the Centre of steering India toward a 'middle-income trap.' Here's what it means

P Chidambaram, Real State of the Economy

Former Finance Minister P Chidambaram released the 'Real State of the Economy' on Thursday. (Photo: Congress)

Rishabh Sharma New Delhi

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Ahead of the Union Budget, the Congress on Thursday released a report titled 'Real State of the Economy,' criticising the Narendra Modi-led central government for steering India toward a ‘middle-income trap’ that could render the country “uncompetitive, unproductive, and unequal.”
 
In the report, released by former Finance Minister P Chidambaram, the Congress claims that the projected GDP growth of 6.4 per cent for 2024-25 falls short of the sustained 8 per cent growth required to harness India’s demographic potential. “GDP growth in the 6 per cent range is insufficient to create jobs for our growing youth population,” the report stated, warning that it could perpetuate high inequality and reliance on government assistance for basic needs.
 
 
Notably, India features among 108 countries listed by the World Bank in its 2024 report as being at risk of getting stuck in a ‘middle-income trap’ unless they adopt radical growth strategies.
 

What is the middle-income trap?

 
The middle-income trap is an economic situation where a country that has achieved middle-income status struggles to transition to high-income status. This often occurs when the factors that initially drove growth—such as low-cost labour and resource exports—become less competitive, and the country fails to shift toward higher-value industries or improve productivity.
 
The World Bank introduced this concept in 2007, defining the ‘middle-income range’ as countries with a gross national product per capita between $1,000 and $12,000 at constant 2011 prices.
 
According to the World Bank, countries in the middle-income trap face challenges such as:
 
• Rising labour costs
 
• Lack of innovation
 
• Income inequality
 
• Demographic challenges
 
• Overreliance on specific industries
 
• Weak institutions and governance
 

What does the Congress report say about these challenges?

 
Rising labour costs
 
The 'Real State of the Economy' report highlights rising labour costs in India, driven by stagnant or declining wages. It states that construction workers have experienced negative wage growth, while salaried employees face a 1 per cent annual decrease. Inflation has worsened this trend, leading to record-high household debt and a 47-year low in savings. The poorest 20 per cent of households have seen earnings fall by over 50 per cent since 2016.
 
The report blames government policies such as demonetisation, GST, and Covid-19 lockdowns for exacerbating the wage crisis, leading to reduced demand and economic instability.
 
Lack of innovation
 
Congress argues that India’s innovation ecosystem is hindered by inconsistent policies, limited R&D investment, and inefficiencies in manufacturing. It claims that the Production-Linked Incentive (PLI) scheme has failed to spur broad industrial growth, and the share of exports in manufacturing has declined sharply. Since 2015-16, 8.1 million manufacturing jobs and 2.4 million SMEs have been lost. Protectionist policies and regulatory delays have discouraged investment and slowed innovation across industries, the report states.
 
Income inequality
 
Citing an Oxfam report, Congress states that income inequality in India has worsened, with the top 1 per cent controlling 40.1 per cent of wealth. Billionaire wealth increased by 41 per cent, while the bottom 50 per cent earn an average of Rs 71,163—75 times less than the top 1 per cent. One-third of Indians live on less than Rs 100 per day, and 80 per cent earn under Rs 200 per day. Corporate tax cuts and high GST rates have favoured the wealthy, while middle-class incomes remain stagnant, contributing to a 47-year low in savings.
 
Demographic challenges
 
The report states that India faces significant demographic challenges, including high youth unemployment (45.4 per cent in FY23) and a reversal in structural transformation, with more people returning to agriculture as manufacturing jobs decline. With GDP growth insufficient to leverage its demographic dividend, India risks falling into a middle-income trap. The emigration of high-net-worth individuals further hampers economic prospects.
 
Overreliance on specific industries
 
The Congress report argues that India’s economy is overly reliant on specific sectors, particularly electronics assembly, which depends heavily on foreign investment and imports. It claims that the PLI scheme has not led to broad-based industrial growth, manufacturing employment has stagnated, and trade dependence on China has increased. The share of exports in GDP has fallen below 20 per cent.
 
Weak institutions and governance
 
The report accuses the government of weakening institutions, which it claims has “eroded investor confidence.” It notes that recovery rates under the Insolvency and Bankruptcy Code (IBC) have declined and that government interventions have undermined the RBI’s independence. The report also criticises the delay in releasing key data, such as the 2021 Census, and alleges that crony capitalism has become more entrenched.
 

How can a country escape the middle-income trap?

 
To overcome the middle-income trap, countries typically need to invest in innovation, education, infrastructure, and a more competitive and diversified economy.
 
South Korea is often cited as a successful example of escaping the middle-income trap. In its World Development Report, the World Bank highlights South Korea’s 3i strategy—Investment, Infusion, and Innovation—as key to its economic advancement.
 
Investment (1960s-1970s): South Korea prioritised substantial investments in infrastructure, education, and industrialisation, laying the groundwork for sustained economic growth.
 
Infusion (1980s-1990s): The country adopted and adapted foreign technologies and practices, enhancing productivity and facilitating the development of competitive industries.
 
Innovation (2000s-present): South Korea shifted from imitation to innovation, investing in research and development to foster homegrown technological advancements, allowing it to lead in high-tech sectors.

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First Published: Jan 31 2025 | 2:59 PM IST

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