India doesn’t have a middle-income trap problem. It has a problem of muddled thinking on economic policy. India needs very deep reforms and steady growth to even get into the upper middle-income category, which is where the middle-income trap problem typically arises.
The World Bank defines a middle-income country as one with a gross national income (GNI) per capita of $1,000-12,000 in 2011 prices — a fairly wide range — broken down into lower and upper middle-income at around $4,000.
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, is most likely headed out of the middle-income trap, unless it stumbles.
Finally, a Trap of Our Own
India is a low middle-income country with a GNI per capita of around $2,000. Even if India reaches $5 trillion in GDP by 2024-25 — GoI’s stated and laudable objective — it will still be a lower middle-income country.
Finance minister Nirmala Sitharaman has said that $5 trillion GDP is only an intermediate goal — on the way to possibly becoming a $9-10 trillion economy, at which point India’s GNI per capita will be around $6,000, close to where Thailand is today and much lower than today’s China or Malaysia. At that stage, we may have to worry about the middle-income trap. For now, our challenge is to avoid the muddled-policy trap we seem to be getting into to reach $5 trillion.
The Economic Survey nicely lays out the direction with a focus on private investment and export-led growth. It shows how investment, exports, productivity, employment and competitiveness are interlinked to create a ‘virtuous’ cycle of growth. We witnessed such a virtuous cycle in 2003-08 — when investment reached 34% of GDP, exports boomed, the economy grew at 8-9%, and poverty declined. Been there done that. Then, why are we falling into such a muddled-policy trap now? Why does the Budget turn more protectionist, when we know that under import substitution policies, India was left behind, growing at the ‘Hindu growth rate’ of 3.5-4%? Why don’t we realise that it only gives excuses to others — such as the US — to close their markets to our exporters? The recent loss of Generalised System of Preferences (GSP) status was a sharp enough signal.
So much discussion is unnecessarily fixated on the announcement about $10 billion of sovereign borrowing, when it does not really matter that much. Sovereign borrowing, if done in small measure, sets a benchmark rate, and with global interest rates so low, it may not be so bad after all. Instead, we should realise that an over-appreciated ‘strong’ rupee is not something to be proud of, as it’s a tax on exporters and a subsidy for importers.
Why do we not make our agricultural sector more competitive by liberalising the markets and free farmers from being trapped into producing cereals — which we don’t need and can’t store — to producing more high-valued crops? Why don’t we stop giving wasteful subsidies — free electricity, and cheap fertilisers and pesticides — which benefit mainly larger farmers and make our farms less productive while depleting water tables and, instead, increase PM-KISAN?
Break the Silos, By the Kilo
Why don’t we, as promised by the previous finance minister, reduce corporate taxes, which are now effectively, at around 44%, the highest in the world?
Why do we fiddle around with income taxes, that will drive away investors and high-income Indians abroad? Why don’t we, as the Economic Survey suggests, stop subsidising the ‘dwarfs’ —firms that are small and stagnant?
Why don’t we also realise that this distinction between large and micro, small and medium enterprises, or MSMEs, is misguided? The Japanese, Germans, South Koreans and Chinese took on the world by having their large firms work in an interlinked way with their MSMEs, not one against the other.
Why don’t we seriously reform our financial system, instead of pouring in good taxpayer money after bad money without tackling the underlying inefficiencies? This has made India have the highest bank intermediation costs in the world, and a non-banking financial companies (NBFC) crisis to boot.
Yes, we have the Insolvency and Bankruptcy Code (IBC) now, and have started nibbling away at non-performing assets (NPAs). But it’s like running arace with a boulder tied to one leg. Let us reform State banks and remove the NPAs into a bad bank and let the IBC process take its course over there.
Finally, why don’t we realise that even a $2.7 trillion market is a very small market in the global economy, about the size of California’s GDP. Germany, the world’s fourth-largest economy, has a GDP of $3.7 trillion, Japan, the third-largest, $4.4 trillion, and second-largest China, $12.4 trillion. None of these economies thinks its own market is big enough. They are among the most aggressive export-oriented economies in the world.
Over a century ago, Swami Vivekananda had said it best: the world is the great gymnasium where we come to make ourselves strong. We better heed that advice, if we really want to first become a $5 trillion economy, and then hopefully a $10 trillion one.
The writer was director-general, Independent Evaluation Office, GoI