|Introduction: Define Middle Income trap.|
Body: Why the concept is criticized and what should India do to avoid it?
Conclusion: Show the way forward.
The World Bank defines it as the ‘middle-income range’ countries with the gross national product per capita that has remained between US$ 1,000 to US$ 12,000 at constant (2011) prices. With a per capita income of over $2000, India is still a middle-income country. The concept suggests that after attaining a lower middle-income level a country struggles to achieve high-income status and is trapped in a period of low economic growth.
Why is the concept of a “middle-income trap criticized?
- Excess focus on domestic factors: Middle-income trap concept tends to ignore the external factors influencing a country’s growth. Eg, the COVID pandemic’s effect on the Indian economy.
- The concept has limited value: Critics argue that after becoming a middle-income market economy, the focus should shift to innovation, and strengthen institutional capabilities to avoid further such traps in the future.
- Different views of economists: Those who are pessimist about India’s future predict that India is forever trapped in middle-income status and its growth is driven by top-tier people and benefits not percolating downwards. Optimists on the other hand predict that sustainable infrastructure and energy transitions will bring new investment and drive India’s growth.
- Limited empirical evidence: The concept of the middle-income trap has been short of case studies except only for South East Asian countries and Latin American countries. Apart from economic factors, social conditions, and political conditions also played a role in generating conditions of middle-income trap for these nations.
How can India avoid the middle-income trap?
- Strong Institutions: India requires strong and credible institutions which can deal with present challenges transparently. These institutions should cater to the needs of citizens and create congenial conditions for investment in infrastructure and push for structural changes in the economy.
- Export-oriented growth: India needs to push its MSME sector for more export share in the global market. Export-led growth has been the main factor in countries escaping the middle-income trap.
- Innovation: The use of technologies, developing skills in citizens, and reaping the benefits of digitalization can certainly help India to avoid the trap situation.
- Human capital: India needs to add to its human capital in terms of highly skilled workers and professionals who are indispensable to high, valued-added, modern services and manufacturing. India needs to overcome its problem of youth unemployment (23.2%) and arrest the decline in female labour force participation.
Some of the suggestions suggested by the PM-Economic Advisory Council to raise income are higher minimum income, urban jobs guarantee scheme, and universal basic income. India needs to urgently address the problem of inequality which has led to the concentration of wealth in the top 1% and prevented wealth to trickle downwards.