About Middle Income Trap
📘 World Bank Report 2024: Escaping the Middle-Income Trap
❓ What is the Middle-Income Trap (MIT)?
- Definition (World Bank): A condition where middle-income countries (MICs)—those with GDP per capita between $1,136 and $13,845—struggle to become high-income economies due to rising costs and declining competitiveness.
- Growth Stagnation Risk: These economies face slower growth after reaching a certain income threshold (around $8,000 per capita, or 10% of U.S. per capita GDP).
- India’s Concern: Risk of stagnating at $5,000–6,000 per capita, falling short of becoming a developed economy.
📊 Key Highlights from the Report
| Indicator | Key Facts |
|---|---|
| Transition Stats | Since 1990, only 34 MICs have become high-income countries. |
| Global MIC Scenario | As of end-2023, 108 MICs host 75% of the global population and contribute 40%+ of global GDP. |
| India’s Position | Lower MIC since 2007; GNI per capita: $2,540 |
| Projected Progress | At current growth rate, India may take 75 years to reach just 25% of U.S. income per capita. |
| MIC Challenges | Ageing population, rising protectionism, need for clean energy transition. |
🧩 Why Do Countries Fall Into the MIT?
1. Competitiveness Trap
- Low-wage competition from poorer countries.
- Lack of innovation and tech upgrading, limiting value-added exports.
2. Structural Shift Challenges
- Stalled transition from agriculture to manufacturing/services.
- Inability to develop high-productivity sectors.
3. Rising Inequality
- Wealth concentration reduces mass consumption and economic dynamism.
- Exacerbates social tensions and leads to political instability.
⚠️ Why is India Vulnerable to the Middle-Income Trap?
| Factor | Explanation |
|---|---|
| 🛡️ Rising Protectionism | Global trend toward trade barriers may hinder India’s export-led growth unlike earlier Asian Tigers. |
| 🌾 Structural Issues | High agricultural dependency (45–50%), premature deindustrialization, and limited value addition in services. |
| 🏛️ State Control | Retrospective taxation, policy uncertainty, and overregulation undermine private investment. |
| 🎓 Human Capital Deficit | Low quality of education; ~55% graduates are unemployable due to skill mismatch. |
| 🌍 Climate Vulnerability | Monsoon-dependence, crop failure, and climate disasters strain resources and impact productivity. |
🧠 Key Recommendations of the World Bank
✅ 3I Strategy: Investment, Infusion, Innovation
- Investment in infrastructure and sectors with spillover effects.
- Infusion of technology and capital.
- Innovation as a driver for competitiveness.
✅ Inclusive Growth
- Provide equal opportunities for women, minorities, and marginalised groups.
- Support business dynamism by incentivizing efficient and innovative firms.
✅ Environmental Sustainability
- Internalize environmental costs in energy pricing to promote sustainable development.
🔧 Additional Measures Suggested for India
| Focus Area | Policy Action |
|---|---|
| 🏢 Privatization | Divest unproductive PSUs to raise revenue, improve efficiency, and attract FDI. |
| 👨👩👧 Middle-Class Boost | Simplify tax system; consider consumption-based taxes to raise disposable income. |
| 👷 Labour Force Participation | Implement NEP, expand Skill India, and improve female workforce inclusion. |
| 🛣️ Infrastructure Development | Speed up critical projects in transport, power, digital infra for growth multipliers. |
| 🏭 Manufacturing Push | Enhance India’s appeal as a global factory via PLI schemes, ease of doing business, and labour reforms. |
| 💰 Private Investment | Facilitate capital access and risk mitigation for private sector infra projects. |
| ⚙️ Structural Reforms | Reform urban planning, financial markets, e-commerce to unlock productivity. |
| 💼 Capital Accumulation | Achieve $30 trillion economy target via public-private investment and capital deepening. |
🧵 Interlinkages for GS Papers
🟨 GS2: Governance
- Human capital formation → NEP, skilling, inequality reduction.
- Policy consistency & governance reforms → Boost investor confidence.
🟩 GS3: Economy
- Growth strategy and structural transformation.
- Role of innovation, sustainability, and private sector.
- Trade policies and response to global protectionism.
🟦 GS1: Society
- Inequality, inclusive growth, gender and caste equity in economic participation.
🧠 Mains Answer Writing Insights
Q. What is the Middle-Income Trap? Discuss why India is vulnerable to it and suggest a roadmap to avoid it.
Approach:
- Define MIT with global and Indian context.
- List factors leading to MIT globally and specifically in India.
- Use World Bank recommendations and additional reforms as the way forward.
- Add examples from South Korea, China, etc., for contrast.
- End with a roadmap to achieve India@2047 vision.
📌 Prelims Pointers
- Middle-Income Trap: GDP per capita range: $1,136–$13,845
- India’s GNI per capita: $2,540 (World Bank classification: Lower MIC)
- Countries that transitioned since 1990: 34
- India’s projected time to reach 25% of U.S. income: 75 years (at current pace)
- Key recommendation: 3I Strategy (Investment, Infusion, Innovation)