Can India Achieve Wealth Before Its Population Ages?
For the past two years, Indian Prime Minister Narendra Modi has set an ambitious goal: to transform India into a high-income, developed country by the year 2047. This vision is underpinned by projections suggesting that India is on track to become the world’s third-largest economy within the next six years. Such a transformation would entail elevating the nation from its current status as a lower middle-income country to a high-income economy, defined by the World Bank as having a per capita Gross National Income (GNI) of $13,846 or more.
Presently, India’s per capita income stands at approximately $2,400, placing it among the lower middle-income nations. This status highlights the significant gap between India’s current economic standing and the high-income threshold. Many economists have voiced concerns about India potentially falling into the so-called “middle-income trap,” a situation where a country experiences rapid growth but struggles to advance beyond a certain income level, hindering its progress to higher economic status.
The middle-income trap is characterized by a stagnation in growth as countries face escalating costs and diminishing competitiveness. Economist Ardo Hannson describes it as a scenario where countries “seem to get stuck in a trap where your costs are escalating and you lose competitiveness.” The World Bank’s recent report echoes these concerns, projecting that, at the current growth rate, India would need 75 years to reach even a quarter of the per capita income of the United States. The report highlights that over 100 countries, including India, China, Brazil, and South Africa, face “serious obstacles” that could impede their progress towards achieving high-income status in the coming decades.
This report examines data from 108 middle-income countries, which together contribute to 40% of the world’s total economic output and nearly two-thirds of global carbon emissions. These nations are home to three-quarters of the global population and a significant portion of those living in extreme poverty. The challenges these countries face include rapidly aging populations, increasing protectionism in advanced economies, and the urgent need for accelerated energy transitions to address environmental concerns.
Indermit Gill, the chief economist of the World Bank and a co-author of the report, emphasizes that the future of global economic prosperity will largely depend on the success of these middle-income countries. He argues that many of these nations rely on outdated strategies to achieve advanced economy status, often focusing too heavily on investment without sufficiently fostering innovation. The report suggests that a balanced approach, combining both investment and technological innovation, is essential for escaping the middle-income trap.
For example, businesses in middle-income countries frequently grow at a slower pace compared to their counterparts in advanced economies. In India, Mexico, and Peru, firms that have operated for 40 years typically double in size, whereas firms in the U.S. grow seven-fold over the same period. This slower growth is exacerbated by the fact that nearly 90% of firms in India, Peru, and Mexico have fewer than five employees, with only a small fraction employing more than ten.
To overcome these challenges, the report advocates for a new approach, drawing lessons from countries like South Korea. South Korea’s remarkable economic transformation is often cited as a model for success. In 1960, South Korea’s per capita income was $1,200, but by 2023, it had risen to $33,000. South Korea initially boosted public and private investment but shifted its focus in the 1970s to an industrial policy that encouraged domestic firms to adopt foreign technology and advanced production methods. Samsung, for instance, evolved from a small noodle-maker into one of the world’s leading smartphone manufacturers by licensing technology from Japanese firms and investing in a skilled workforce.
Countries like Poland and Chile have followed similar strategies. Poland enhanced productivity by integrating Western European technologies, while Chile promoted technology transfer to stimulate local innovation, such as adapting Norwegian salmon farming techniques to become a top salmon exporter.
Historical patterns reveal that many countries face a growth “trap” when they reach about 10% of U.S. GDP per capita, or approximately $8,000 today. Since 1990, only 34 middle-income countries have successfully transitioned to high-income status, with many benefiting from European Union integration or newfound oil reserves.
Economists Raghuram Rajan and Rohit Lamba argue that India must accelerate its economic reforms to avoid lagging behind. They estimate that even with a strong per capita income growth rate of 4%, India’s per capita income may only reach $10,000 by 2060, still lower than China’s current level. They emphasize the importance of creating quality employment opportunities for the youth to harness a potential population dividend and drive economic growth. This approach is crucial for India to potentially become an upper-middle-class economy before it faces the demographic challenges of an aging population.
In summary, while India’s goal of achieving high-income status by 2047 is ambitious and feasible, it requires overcoming significant challenges and adopting a more dynamic economic strategy. The country must navigate the risks associated with the middle-income trap, leverage demographic advantages, and foster a robust environment for innovation and investment. By learning from successful models and addressing structural issues, India can improve its prospects of joining the ranks of developed nations.
