In order to understand the middle income trap, we need to first understand what a middle-income economy is. Based on the gross national income per capita, the World Bank classifies economies into the following broad categories:
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The GNI per Capita Thresholds for the purpose of economy classification and that of the United States of America, United Kingdom, China and India are depicted in the graph:
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What is the middle-income trap?
It has been seen that countries in the low -income economy bracket, experience a rapid growth but as they reach the middle-income economy bracket, their growth stagnates and they are not able to move to a high-income economy bracket.
Countries such as Argentina, Brazil, Mexico, Russia and South Africa have stayed ‘trapped’ for a long time in the upper middle-income category. China, with a GNI per capita of around $9,800, now in this group, was most likely to get out of the middle income trap, but it is now difficult to break through the trap because of the COVID-19 pandemic.
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Will India get “trapped”?
The Economic survey of India has highlighted the possibility of India getting into a middle income trap. The challenges that led India to the possibility of getting into this trap are:
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Ways that India can avoid the middle income trap are:
- Improve agricultural productivity.
- Improvement in human capital.
- Favourable relations with other countries with the help of FTAs, bilateral agreements, multilateral agreements, etc.
- Boosting private investment.
- Boosting domestic consumption through measures such as reduction in GST rates, higher employment creation, universal basic income, lower personal Income Tax rates etc.
- Innovation to boost technical know-how.
- Implementing land and labour reforms.
