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India’s Development Challenge: Avoiding the Middle-Income Trap and Ensuring Inclusive Growth
Context:
India became a lower middle-income economy in 2007 and remains in this category even after 18 years. The challenge lies in avoiding the middle-income trap for western and southern states while ensuring rapid growth for poorer states. Achieving high-income status requires sustained, well-planned economic policies and institutional reforms.
India’s Middle-Income Status
- India’s per capita income has grown from $1,022 in 2007 to around $2,700 in 2025.
- A country stuck in the lower middle-income category for 28 years is considered trapped.
- The threshold for upper-middle-income status is $4,516, while India’s per capita income is projected to be $4,195 by 2029 (IMF).
- Regional variations exist: some states are nearing upper-middle-income status while others remain low-income.
Western and Southern States: Growth and Challenges
- States like Telangana ($4,306), Karnataka ($4,021), Haryana ($3,934), Tamil Nadu ($3,807), and Delhi ($5,579) are approaching or exceeding upper-middle-income levels.
- Policy and market dynamics, such as Production-Linked Incentives (PLI), reinforce their growth trajectory.
- Economic activities span across:
- Manufacturing: Apparel, automobiles, mobile phone assembly, semiconductors.
- Services: IT, chip design, skilled labor-intensive industries.
- Agriculture: Higher value-added activities like dairy and poultry.
- Challenges:
- Avoiding the middle-income trap.
- Developing technological capabilities.
- Expanding into high-value exports.
- Managing labor and capital cost efficiency.
- Addressing constraints like rising wages, labor shortages, and capital accumulation.
Poorer States: Barriers to Economic Progress
- States like Bihar ($729), Chhattisgarh ($1,780), West Bengal ($1,861), and Odisha ($1,970) remain in the low-income category.
- Reasons for low economic status:
- Lack of a strong manufacturing and modern services base limits growth opportunities.
- Dependence on natural resources (minerals) without value addition.
- Policy gaps despite the central government’s political support in these regions.
- Redistribution policies alone are insufficient; structural economic transformation is needed.
Policy Considerations for India’s Growth
- Trade Strategy:
- Should India adopt freer trade or continue protectionist policies?
- Balancing domestic industry support with global competitiveness.
- Industrial and Services Policy:
- Should the government continue national champion strategies?
- Promoting broad-based entrepreneurship rather than favouring select firms.
- Institutional Strengthening:
- Building and reinforcing governance institutions for sustained economic growth.
- Ensuring transparent and effective regulation.
- Political-Economic Balance:
- India’s political power is often disconnected from its economic power centres.
- How will this regional disparity influence policy choices and economic prospects?
