India wants to become a 'developed' country - can it break out of the middle-income trap?

India has a high rural poverty rate. EPA

India is now officially the world’s fastest-growing large economy, as well as the world’s most populous country. But New Delhi’s sights are set still higher. The country’s finance ministry released a report at the end of January confidently predicting that India, currently the world’s fifth-largest national economy (excluding the supra-national EU), will climb up to third position by the end of the decade. A number of major US private financial institutions have since endorsed this forecast, highlighting India as a top investment opportunity, especially given mainland China’s de-prioritisation of high growth and disengagement with western capital.

Far less attention has been paid to an even more ambitious goal stated by India’s chief economic adviser during the original report’s release. Anantha Nageswaran announced that the government intended to achieve “developed” country status by 2047, a century after independence from the UK. In order for this to happen, India’s Human Development Index (HDI) status will have to climb from medium, past high, to very high. Similarly, per capita incomes would have to increase sevenfold from lower-middle income status to reach the high-income bracket.

This is a far, far harder task than increasing the overall size of the economy, in part because one has very little automatic impact on the other. Despite steady growth in the size of India’s economy (both in absolute terms and relative to other countries) over the past three decades, India’s current ranking for inequality-adjusted HDI (IHDI) is 108 out of 156, and 132 out of 190 in terms of per capita income. In other words, although most Indians have been lifted out of dire poverty, their incomes, education levels and life expectancies remain very modest in comparison to the average person born into a highly developed economy.

Although the contrast in India’s case is particularly extreme, the underlying problem is near-universal. Decades of evidence shows that turning a developing middle-income country into a developed high-income one is far, far harder than lifting up low-income countries into middle income. This is known as the “middle-income trap”, which even China, although close, is not yet certain to escape. Despite decades of explosive growth, China still only ranks 61st in the world for per capita income, and 67th for IHDI. And now, between the shrinking size of China’s ageing workforce and its new non-growth-focused policy framework, it is unclear how much forward momentum the country has.

But making sense of development in India is complicated by the fact the country has some of the largest internal regional disparities to be found anywhere in the world, and rapid economic growth has only widened these differences. The state of Goa, for example, has the highest per capita income in India, comparable to Colombia and Ecuador, which are “upper-middle income” countries. This figure is almost ten times that of Bihar, which puts the state at the level of “low income” countries like Eritrea and the Democratic Republic of the Congo. Tragically, average life expectancies correspond with those disparities: Goa’s is at 73.3 years, and Bihar’s is almost a decade shorter.

The problem is that India’s highest-income and most developed areas, like Goa, are amongst its smallest. Although India has 36 states and union territories, the twelve largest states together hold 80 per cent of the national population. Tellingly, none of these big states, including star performers like Gujarat, Maharashtra, Tamil Nadu and Karnataka have climbed above lower-middle income status and a medium level of HDI. Given that Bihar’s population of 130 million is almost 10 times that of Goa, even big gains by Goa (like moving from “high” to “very high” levels of HDI) do very little to lift India as a whole. This means India must focus its efforts on the places where the bulk of its population lives in order to make dramatic overall improvements.

Uttar Pradesh, India’s most populous state, with close to a quarter of a billion people, has particularly low levels of income, life expectancy and education, as do neighbouring Bihar and Madhya Pradesh. These three adjoining states hold a staggering 450 million people together and represent the largest cluster of poverty, illiteracy, malnutrition and lower life expectancy in India.

Although the central government has significantly expanded welfare schemes such as health insurance, and is increasingly enabling online enrolment, physical access remains highly problematic. Transport networks remain highly underdeveloped, and while primary schools and clinics are insufficient and badly under-resourced. In many cases, marginalised populations have been conditioned by dominant ones to not compete with them for access. It is hard to imagine progress of the kind envisioned until the complex challenges of these three states in particular are tackled, requiring not just the reallocation of resources, but reforms to governance structures and the involvement of grassroots social movements.

But if accelerating development in these highly challenged regions does in fact become a top-level policy priority at the state and central government levels, India does enjoy three major enablers. As noted in one of my earlier columns, the government and Reserve Bank have done an outstanding job of maintaining stability in the face of global economic volatility, while much of South Asia has struggled to remain afloat.

Second, India’s combination of high growth and a large, young labour pool provide tremendous potential, especially if training and education are made available. And third, mobile broadband penetration India’s massive investment in digital public infrastructure paves the way for those even at the bottom of society to benefit from inclusion with banking, education, governance and a rapidly expanding welfare net.

India’s escape into broad-based prosperity is far from impossible, but it is certainly not inevitable either. Sustained efforts by every level of government require broad-based public support. India’s voters (the country is in an election year), especially relatively well-off ones, must understand these policies as a vital element of India’s long-term economic success, rather than dismiss them as populist pandering.

One of the most important elements of the escape from the middle-income trap is the transition from state-led and export-led growth to domestic consumption-led growth. That kind of spending by individuals and families is simply not possible until hundreds of millions more Indian households can experience financial security, which in turn is not possible without access to health, education and a regular income.