Blitz Bureau
NEW DELHI: India has crossed the low-income barrier and is now firmly positioned as a lower middle-income economy, the next leap into sustained upper middle-income status will test not just the growth momentum but structural depth.
The phrase ‘middle-income trap’ describes a familiar pattern: countries grow rapidly on the back of cheap labour, urbanisation and capital accumulation, but then stall as wages rise, competitiveness weakens and productivity fails to keep pace. Escaping the trap requires moving from efficiency-driven growth to innovation-led expansion.
Consider South Korea. In the 1960s, its per capita income was comparable to India’s. Today it is a high-income, technology powerhouse. The shift was deliberate. Seoul invested aggressively in education, built globally competitive conglomerates, prioritised exports, and moved steadily up the value chain — from textiles to automobiles to semiconductors. Crucially, policy discipline aligned with performance metrics: firms that failed to compete globally did not receive endless protection.
Contrast this with Brazil. Blessed with resources and scale, Brazil achieved early industrial depth but faltered amid macro-economic instability, protectionism and underinvestment in productivity. Cycles of fiscal populism and structural rigidity eroded competitiveness. Growth became episodic rather than compounding. The lesson: size and natural wealth are insufficient without institutional coherence and reform continuity.
Then there is Malaysia, which managed steady growth and industrial diversification but has struggled to fully transition into a high-innovation economy. Heavy reliance on electronics assembly and commodities limited technological depth. Malaysia avoided stagnation, yet it has hovered below the high-income threshold for years. Its experience underscores that partial upgrading is not enough; sustained innovation ecosystems matter.
To avoid the middle-income trap, it is imperative for India to make decisive move from aspiration to execution, from scale to sophistication, and from headline growth to productivity-led transformation
Where does India stand? Unlike export-dependent East Asia, India’s growth has been unusually services-led. IT, digital platforms and global capability centres have delivered scale without commensurate manufacturing depth. This model has strengths: strong foreign exchange earnings, a vibrant start-up ecosystem, and rising formalisation. But it also carries risks. Manufacturing employment remains limited, female labour force participation is low, and productivity dispersion between formal and informal sectors is stark.
To avoid the trap, India must execute on three fronts.
First, human capital. Schooling access has improved, but learning outcomes remain uneven. The demographic dividend can easily become a demographic drag without skills aligned to advanced manufacturing and AI-driven services.
Second, export competitiveness. Production-linked incentives signal industrial ambition, but logistics costs, regulatory unpredictability and tariff complexity still dampen scale. The discipline that shaped South Korea’s export push — global benchmarking and ruthless efficiency — must replace incrementalism.
Third, institutional depth. Judicial delays, contract enforcement gaps and policy reversals raise transaction costs. Brazil’s stop-start reform cycle is a cautionary tale India cannot afford to emulate.
India’s advantage is timing. Supply chains are diversifying. Digital public infrastructure has leapfrogged legacy constraints. Corporate balance sheets are healthier than a decade ago. The window is open — but not indefinitely.
The middle-income trap is not destiny; it is drift. Avoiding it demands that India move from aspiration to execution, from scale to sophistication, and from headline growth to productivity-led transformation. The next decade will decide whether India merely grows or truly graduates.