Middle Income Trap

  • IASbaba
  • January 14, 2020
  • 0
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Indian Economy

TOPIC:General Studies 3:

  • Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment. 

Middle Income Trap


  • GDP growth for FY20 is likely to come in at 5%, an 11-year low. Nominal GDP growth will likely be at more than a four-decade low.
  • Apart from the debate on whether the slowdown is cyclical or structural, there is also concern among the economists about the dangers of Middle-Income trap in medium to long term

What is Middle Income trap?

  • In 2006, economists Indermit Gill and Homi Kharas at the World Bank coined the term “middle-income trap” while working on growth strategies for East Asian economies. 
  • Simply put, low-income countries with cheap labour and access to ready-made technology grow fast and start becoming wealthier. 
  • However, as they reach middle-income status, they tend to slow down as they lose some of their advantages. They fail to converge with wealthier nations and do not get beyond middle-income status. 
  • It is a status of low productivity and entrenched inequality.
  • Mexico and Brazil are classic examples of such countries. 
  • A few, such as South Korea, have escaped the trap. China is at the cusp.

On what basis are countries usually categorized?

World Bank has used the 2018 data of gross national income (GNI) per capita to categorize countries into following four categories

  1. Low income: Countries with GNI per capita is up to $1,025 
  2. Lower middle-income: Those with GNI per capita from $1,026 to $3,995. Ex: India – its per capita income in 2018 was $2,020, at the halfway point for the lower middle-income category.
  3. Upper middle-income: Countries with GNI Per capita between $3,995 and $12,375 are upper middle income Ex: Brazil, South Africa, Mexico, China 
  4. High income: Per capita income above $12,375 makes a country high income. Ex: US, Germany, Japan, Korea.

The way the World Bank’s income classification system works is that as economies grow, the thresholds for these four categories also change. The threshold for the low-income category in 1988 was only $545.

Overall, the lower and upper middle-income thresholds have increased at 2% per year over the last three decades. Over this period, India’s per capita income grew at an annual rate of about 5.6%. 

Cause of Concern for India

  • If we assume that World Bank thresholds and India’s income per capita grow at the same pace as they have in the past 30 years, it will take India until 2038 to reach the lower end of the upper middle-income threshold
  • Likewise statistics reveal that even in 2050, India would be well below Brazil and South Africa.
  • India’s growth since the 1990s was on the back of consumption by the top 100 million Indians. The inequality has widened since then and therefore, the future growth has to come from bottom sections of societal pyramid
  • For this to happen there has to be adequate demand from these sections of society & thus adequate jobs and rising incomes

Way Ahead

  • Thus there has to be a comprehensive agenda of policy and institutional change to create a dynamic capitalism, else there is a risk of a Latin Americanization of India’s path 
  • This involves changes in education, healthcare, skilling, agricultural, judicial and regulatory reforms.

Connecting the dots

  • Impact on slowdown on India’s diplomatic might.
  • Doubling of Farmers income and Make in India initiative
  • Political and Constitutional federal structures which enables comprehensive changes

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