The chairman of the Economic Advisory Council to the Prime Minister, S. Mahendra Dev, warned recently that India’s economy must grow consistently at 7%- 8% per annum if it is to evade the middle-income trap. This trap implies a state when economic growth slows down and a nation finds it difficult to transit from a middle-income country to a high-income one. There are some well-known features of the middle-income trap. Initially, rapid economic growth is characterised by the spread of low-end traditional services. This growth raises wages as a result of which the economy cannot compete in low-cost manufacturing production at the international level. It requires innovations and access to new technologies to drive the economy competitively to the next higher phase of growth. If, however, the culture of innovations is absent, or the supporting institutions are weak, the economy might remain in the middle-income level for a long time.
The chairman of the EAC-PM must have observed trends that do not rule out India falling into such a trap. Innovations are not emerging locally and the share of investment is not climbing up from the low 30% range. India has been lagging behind when it comes to top-class research. Its institutions of higher education have been tarnished by political control. No Indian institution makes it to the top tier in international rankings. Students and scholars routinely leave India for greener pastures abroad. Business houses prefer to buy tested technology off the shelf rather than take the risk of nurturing and developing new ideas into knowledge. Consequently, the knowledge-producing industry’s infrastructure is often of poor quality. Moreover, political objectives prevent, more often than not, the identification of the best leadership that has the potential to deliver results. In India, institutions of higher education and research have deteriorated even further in the last few years; poor leadership, faculty vacancies, and questionable curricula augment the challenges. The growth that has occurred is mainly in the traditional services. But challenges plague these services as well. India, for instance, earns a lot from its pharmaceutical sector where the bulk of the revenue comes from the production of generic drugs. But the modern aspects of this segment — the domain of biotechnology or Artificial Intelligence — that can be mined for future profitability remain underutilised. India must find a way to overcome these challenges and reach the next phase of economic growth, thereby eluding the middle income trap.
