Sushma Ramachandran

A World Bank report has raised questions about the road map for India and other emerging economies to reach the high-income levels of the developed world. It warns that most countries seeking to move out of low-income scenarios tend to get mired in a “middle-income trap”. Getting out of its grip is not an easy task. It suggests that countries like India which seek to become advanced economies should move away from the old playbook and adopt new strategies.

The concept of the “middle-income trap” was formulated nearly two decades ago by economists who studied the growth path of many countries including China, India, Indonesia, and South Korea. The validity of these findings has been debated since then to identify policies that help economies move out of the middle-income category. The income range of the trap itself is pegged at about ten percent of the annual US GDP per person or about 8000 dollars today.

The Bank’s latest study on this issue has been presented in the World Development Report for 2024. It warns that it will take India 75 years, Indonesia nearly 70 years, and even China at least 10 years to reach one-quarter of the US per capita if they stick to current strategies. The report advises that policies need to move away from the old playbook and a new “3i” strategy adopted by countries striving to get out of the middle-income category. Investment, infusion, and innovation are the highlights of the new approach.

The World Bank’s chief economist, Indermit Gill, who is one of the authors of this concept, has noted that the domestic environment in India is better today than 20 years ago. In an interview, he said the country is domestically, in some sense, at its prime potential. On the target set by the present government to become a developed nation by 2047, he felt the present set of debates over whether to go for manufacturing and services, were not sufficient as all segments needed to be doing well.

These debates were sparked off by former RBI Governor Raghuram Rajan’s argument that it made more sense to expand the already- vast services sector instead of trying to build up a manufacturing base.

As for the policy approach suggested by the Bank, it does not appear dramatically different from existing conventional strategies. The thrust on investment and infusion envisages adopting technologies from abroad and infusing them across the economy. South Korea is cited as having done so and thus shortened the path towards high technology output. India is similarly trying to lure foreign investors to set up projects in high-tech areas. This includes semiconductors where a big push has been made to attract firms in this segment. The technical expertise in chip design is available here but the technological expertise for manufacturing is absent. Drawing on high technology from abroad is the way to go, and the Bank’s prescription would give an additional heft to policymaking in this area.

The report is critical of countries that seek to rely initially on indigenously-developed technology as such an approach risks wasting scarce resources. It highlights the fact that South Korea subsidised the adoption of foreign technology rather than incentivising the production of knowledge at the frontier of human thought. It points to this country as having beaten the odds through such policies. It thus managed to reach per capita incomes matching developed countries like the U.S. In this context, the report views India’s Make in India policy favourably as it seeks to attract foreign investment in a wide swathe of manufacturing sectors.

This brings us to the third ‘I’ of the 3i formula - that is, innovation. Here there is no doubt that performance has been uneven. Gill has commended the spread of digitalisation throughout the economy, but it will be a long way before India is viewed as a leader in innovation. Yet there is one example of innovation that must be acknowledged as a significant achievement. And that is the development of the United Payments Interface (UPI) that has revolutionised money transfers in this country.

India will have to step up its expenditure on research and development to become a bigger player on the world stage. Even in the arena of computer software and artificial intelligence (AI), this country is not a trendsetter as yet.  To move the economy to a higher plane of development, the process of innovation will have to move faster than ever before.

Gill has described the debate over manufacturing versus services as a “vertical” debate while the thinking should be about the entire economy doing well which implies the need for “horizontal” policies. In other words, it makes no sense to talk only about a services-led or a manufacturing-led economy as both are essential to driving development.

This is a valid description of the debate that appears to put the economy into silos. Any country that lacks a sizable manufacturing base will not be able to push growth to the high level needed to ensure sustainable and rapid economic development. As for services, these already account for over 50 percent of the country’s GDP and are contributing substantially in terms of exports. So, there should be no need to opt for only one sector or the other.

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The solutions offered for getting out of the middle-income trap are not much different from the existing thrust of economic policies in this country. Perhaps the sole lacuna is the lack of priority being given to research and development by both the public and private sectors. The result of these policies must be, however, to ensure that the economy grows consistently consistently at the rate of six to eight percent over two decades. Only then can India reach its goal of becoming a developed nation.