Will the Indian Economy reach Upper-Middle Income Status by 2038?

For the Motion – Ayushi Ghosh

When in conversation about our country’s economy, one is often met with clicking tongues and disappointed nods. Amidst rising fuel prices, falling GDP growth rates and the economic setbacks that came with the pandemic, the future of our economy seems bleak to the ordinary man. There may, however, be hope for our economy yet.

The World Bank defines ‘upper-middle income economy’ countries as those characterised by a Gross National Income (GNI) per capita between $4,046 and $12,535 (as of 2021). Currently, India lies in the lower-middle income category, at a GNI per capita of $2,120 (as of 2019). As mentioned, most aspirations to ascend economically have been met with scepticism in recent years, due to a disappointing GDP growth rate and general economic slowdown. The onset of the pandemic only worsened these worries, as businesses were forced to shut down and thousands lost their livelihoods.

The problem of unemployment has existed in the country since much before the pandemic. While employment rates began picking up again as industries resume regular operations, demands for a long term solution to the same persist. This phenomenon is best observed in the service sector in India; though it contributes the lion’s share, that is, about 60% of the country’s GDP, it only employs about 25% of its labour population (Lakshman, 2019). The true potential of the service sector thus, remains severely untapped. 

The crux of this problem, as observed by the government, lies in the ‘skill gap’ among labourers of our country, and has it thus sought to work towards increasing the employability of the Indian population accordingly- through measures such as the establishment of the Ministry of Skill Development and Entrepreneurship (MSDE), the National Skill Qualification Framework (NSQF), and through National and State Skill Development Missions (NSDMs and SSDMs respectively). 

The government has also endeavoured to revitalise the education system at the primary and tertiary levels so as to suit the requirements of a modernised India. The introduction of the New Education Plan (NEP) aims to increase expenditure education from 3% to 6% of the GDP as well as encouraging primary education in the mother tongue to better accommodate rural population is a major step towards the same. (BusinessToday.In, 2020)

The most important statistic to note when discussing the future of India’s growth is its working population- projected to be the largest in the world at about 1.1bn by the year 2040.  About half of India’s economy is expected to rise to middle class status by 2030. India’s consumer demand plays a crucial role in determining the direction of the economy. The demographic composition of the country foretells that India will remain one of the youngest nations in the world in the mid 2030s, and thereby one of the largest markets in the world. 

Consumer expenditure is expected to grow fourfold by 2030. About 37% of the population will be constituted by Millennials  & Gen Z (born after 1981), who will drive the consumer demand of the country (World Economic Forum, 2019). Moreover, due to this demographic advantage, India is also becoming an increasingly attractive destination for companies seeking to relocate their manufacturing bases from nations like China. This process has been further accelerated by growing anti-China sentiments, as well by India’s recent goodwill gesture of providing numerous countries with Covid-19 vaccines free of cost. This gesture served not only as a source of soft power for India, but also as an advertisement for the prowess of our manufacturing and export hubs. 

Our prime minister has already begun leveraging this gesture to invite companies to invest in India and urging them to collaborate with India through the production-linked incentive scheme (PLI) in his speech at the virtual World Economic Forum Summit. As commerce becomes increasingly focussed on growing in virtual retail spaces, India’s reliable, English-speaking IT sector continues to expand as a centre of outsourced labour as well. As the business world becomes cognisant of the same, the appeal of investing into Indian markets continues to grow.

Upon studying the conditions under which countries like Thailand have been able to ascend to the middle income status in the recent years, the role of urbanisation in economic growth stands out. India seems to be following a similar trajectory of rapid urbanisation and corresponding economic growth. Due to its dense population, India is able to sustain this growing urbanisation without facing any shortage in rural labour. As proved empirically by Dr. Laxmi Narayan (2014) in his paper, the relationship between urbanisation and development in India is only getting stronger with time. Indian cities are expected to contribute to 70% of our GDP by 2030. (The Economic Times, 2020)

Institutions such as the IMF have expressed their faith in India’s ability to recover from the economic devastation caused by the pandemic, given that the government takes appropriate measures. These include properly calibrated relief measures as well as measures for reducing supply side demands in terms of labour via education and skill development, which as we have noted, the government has already begun implementing. 

Projections indicate that in the best case scenario (given that there are no more economically devastating events in the near future), India should be able to resume its pre-pandemic growth rate by 2023. These sentiments have also been echoed by the OECD, RBI and Economic Survey, who project India’s GDP growth for the year 2022 to be 12.6%. 10.5% and 11% respectively (Press Trust of India, 2021). It is thus safe to say that India’s ambitions of becoming an ‘economic superpower’ and an upper middle income economy have only been slightly delayed and not lost entirely.

Therefore, as long as the government is able to create and meaningfully implement relevant policies, India should be able to achieve upper middle income status by 2038.

 Against the Motion – Savio Joe

In 1998, Dr APJ Abdul Kalam, former Indian president and world renowned space scientist, co authored a book titled “India 2020: A Vision for the New Millennium”.

It had a very simple message: India would become a superpower in the next two decades. At the time this was a very bold statement, especially considering the fact that India was a very poor country which was unable to reach even the average global standards of human development.

Kalam’s extreme optimism was largely met with adulation which in turn boosted his popularity among the citizens, thus helping him become the president of India in 2002.

The only problem is that Kalam was completely off the mark. Being in 2021, we know how far we are from being a superpower, even escaping from the lower-middle income category in the coming two decades, would be a miracle in itself.

Today, the pandemic has, in every sense of the word, wrecked the Indian economy and has made the situation even worse. So much so that it would take India years to get back on the pre-Covid growth path. Due to India’s strict lockdown, the country’s GDP contracted by 23.9% in the April-June quarter. The IMF projects that the Indian economy would contract by 8% in 2020. Moreover,  there are serious consequences when a low income country like India has a negative growth rate, as it can push a large number of its people into extreme poverty.

Even more troubling is the fact that the current administration has done little on the ground to halt the Indian economy’s downward spiral. Not only has the government not provided a stimulus, ignoring expert opinion, Union government expenditure has actually fallen.

When we examine this predicament, it may seem that India’s economic struggles were caused by the pandemic, but nothing could be further from the truth.  

Since 2017, the Indian economy has been gradually slowing down, reaching a growth rate as low as 4.2% in 2019, which was the lowest since the financial crisis of 2008. India experienced this slowdown at a time when there was a global economic resurgence. Many economists have attributed this decline to a structural slowdown.

During the economic reforms of 1991 there was a period of strong economic growth, lifting millions out of poverty and increasing the size of the economy by almost nine times in about 30 years. But unlike other prosperous East-Asian countries like China and Vietnam, India did not experience a mass shift from farms to factories. This essentially means that India did not create a robust enough secondary sector, as a result it hardly accounts for 27% of the GDP as compared to 40% in China. This sector is especially important because of its labor intensive nature, therefore playing a major role in reducing unemployment.

On the contrary, India’s economic growth was fuelled by the investment in the service sector. This meant that during this economic growth only a few million high-skilled jobs were created, thereby forcing a staggering 90% of the workforce to be employed in the informal sector.

Effectively we could say India experienced a jobless growth, which in many ways was not sustainable. Therefore, in 2018, unemployment reached a 45 year high of 6.1%.

Thus, without a robust manufacturing sector and without becoming a part of the global supply chain, India will simply be wasting away its so-called ‘demographic dividend’.

Surprisingly, India has very low levels of human capital growth for an ambitious major economy. India’s total healthcare spending is at 3.6% of GDP, which is much lower than the average of 8.8% among other OECD countries. Even education accounts for only 3% of the GDP whereas the average is 3.5%. Thus, the World Bank ranked India at a lowly 115th out of 157 countries in its Global Human Capital Index.

As of 2019, India is a low-middle income country with a Per Capita Income of $2,099. Over the last 30 years, the World Bank’s lower and upper middle-income thresholds have increased by 2% every year. At the same time, the Indian economy also grew by 5.6% annually. In the pre-pandemic world, assuming that these numbers did not change, it would have taken India until 2038 to reach the lower end of the upper middle-income threshold.

Today this target more or less feels like an impossible dream, firstly due to the havoc wreaked by the pandemic and secondly due to a multitude of socio-political issues in the country.

While India has always been a poor country, its democracy has always been seen as a model for other developing nations. However, in recent years, as the current government has doubled down on its Hindu nationalist agenda, this image of India has also been tarnished.  

Of late, India has continued to perform terribly in the Human Freedom Index. In 2020, Freedom House demoted India from a “free” country to a “partly free” one. This is in light of the passing of a discriminatory bill i.e., Citizenship Amendment Act, the horrific communal riots in Delhi, the migrant crisis during the lockdown, the inhumane treatment of the protesting farmers, the arrests of journalists, activists, students and anyone in general who publicly opposes the government.

Even independent institutions such as the Election Commission and the RBI have not been spared, as the current administration has appointed its own supporters, and thereby has tilted the balance in favour of its ideological positions. Of late, even the judiciary has supported the government on several critical judgements rather than fulfilling its duty of upholding the fundamental rights of the citizens.

Furthermore, the twin blow of demonetisation and the badly-designed and hastily-implemented GST was a complete disaster for India’s economy.

Thus, when one factors in all these problems, it won’t be a surprise if the investment rates in India start to fall. Furthermore, a slowing down of investments would absolutely devastate a developing country like India.  

To put it simply, India needs to invest heavily in its human development, and change the very ‘structure’ of its economy and its political system. So as long as the government is in denial and does not accept these inherent flaws, nothing short of a miracle can help us reach the upper-middle income category in the next two decades.

– (Writers, Econ Declassified)

 References:

BusinessToday.In. (2020, July 23). Union Budget 2020: How much will Modi govt spend on education? https://www.businesstoday.in/union-budget-2020/news/budget-2020-how-much-will-modi-govt-spend-on-education/story/395077.html

Contributors, E. T. (2020, November 27). View: India’s urbanisation challenges and the way forward. The Economic Times. https://economictimes.indiatimes.com/news/economy/policy/view-indias-urbanisation-challenges-and-the-way-forward/articleshow/79443872.cms

How India will consume in 2030: 10 mega trends. (2019, January 7). World Economic Forum. https://www.weforum.org/agenda/2019/01/10-mega-trends-for-india-in-2030-the-future-of-consumption-in-one-of-the-fastest-growing-consumer-markets/

Lakshman, R. (2019, May 16). Service Sector in India: A Paradigm Shift. Invest India. https://www.investindia.gov.in/team-india-blogs/service-sector-india-paradigm-shift

Narayan, Laxmi. (2014). Urbanization and Development. 1. 901-908. Retrieved From https://www.researchgate.net/publication/315456525_Urbanization_and_Development 

Our Bureau. (2018, October 6). ‘Demographic dividend will drive India’s future growth.’ @businessline. https://www.thehindubusinessline.com/economy/demographic-dividend-will-help-in-indias-future-growth/article25142900.ece

Press Trust of India. (2021, March 24). Fitch upgrades Indias GDP growth to 12.8% for FY22. Www.Business-Standard.Com. https://www.business-standard.com/article/economy-policy/fitch-upgrades-india-s-gdp-growth-to-12-8-for-fy22.html.

Sharma, A. (2021, January 28). Invest in India, a vibrant democracy with a business-friendly climate and a big market: PM tells CEOs at W. The Economic Times. https://economictimes.indiatimes.com/news/economy/finance/invest-in-india-a-vibrant-democracy-with-a-business-friendly-climate-and-a-big-market-pm-tells-ceos-at-world-economic-forum/articleshow/80512833.cms?from=mdr

Thailand Now an Upper Middle Income Economy. (2011, August 2). World Bank. https://www.worldbank.org/en/news/press-release/2011/08/02/thailand-now-upper-middle-income-economy#:%7E:text=As%20of%20July%201%2C%202011,is%20currently%20at%20US%244%2C210.

M. (2020, January 13). Opinion | It’s still too early to worry about a middle-income trap. Mint. https://www.livemint.com/opinion/online-views/it-s-still-too-early-to-worry-about-a-middle-income-trap-11578935058982.html 

Rohit Inani, qz.com. (2020, January 14). India may fall into a middle-income trap, from which no country has been able to bounce back. Scroll.In. https://scroll.in/article/949745/

Daniyal, S. (2020, December 31). 2020 was the year India was supposed to become a superpower. Instead, it got left behind. Scroll.In. https://scroll.in/article/982152/2020-was-the-year-india-was-supposed-to-become-a-superpower-instead-it-got-left-behind 

Rao, V. V. (2020, July 10). Developed economy dream-middle income trap-extreme poverty reality. National Herald. https://www.nationalheraldindia.com/opinion/developed-economy-dream-middle-income-trap-extreme-poverty-reality

Photo Credit

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