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When will India become an upper-middle-income country like China? Unlikely for 25 yrs

India is likely to join the ranks of middle-income countries in the 2030s but will not have a per-capita gross national income comparable to upper MICs for 25+ years.

Majenta and Blue line merge near Botanical Garden metro station | Photo: Suraj Singh Bisht | ThePrint
Delhi skyline | Photo: Suraj Singh Bisht | ThePrint

What will it take for India to become an upper-middle-income country? It can learn a lot from the experiences of other countries that have preceded India on this growth journey.

At the end of 2021, India’s per-capita gross national income (GNI), the metric used by the World Bank to classify countries by income group, was estimated to be $2,277. The World Bank currently classifies countries whose per-capita GNI lies between $1,036 and $4,045 as lower middle-income countries (MIC) and those whose per-capita GNI lies between $4,405 and $12,235 as upper MICs.

Can India catch up to Malaysia and China?

Figure 1 displays a range of possibilities for India’s per-capita GNI over the next 26 years, when India will have completed 100 years as an independent nation. The blue line represents an optimistic scenario where India’s growth rate averages 9 per cent annually. If it comes true, then India’s per-capita GNI in 2047 would be approximately $21,400—more than 9 times greater than what it is today. The red line represents a pessimistic scenario where India’s growth rate averages 4 per cent per year. In this scenario, India’s per-capita GNI in 2047 would be approximately $6,300—about 2.75 times greater than what it is today.

Figure 1 also displays a range of possibilities for the lower and upper limits of per-capita GNI for the entire group of upper MICs. The per-capita GNI for the lower limit (in purple) as well as the upper limit (in black) are assumed to grow at an average of 3 per cent per year for 26 years.

Illustration by Ramandeep Kaur | ThePrint

Figure 1 leads to three observations. First, even if India were to grow at an annual rate of 9 per cent, it will take a minimum of 10 years (that is, 2032) for India to join the ranks of upper MICs. Achieving per-capita GNIs comparable with wealthier upper MICs such as Malaysia and China, will likely not happen for the next 25+ years. Second, maintaining high rates of growth will become harder as India’s per-capita GNI increases. Economists Eichengreen, Park and Shin found that many MICs first experience a slowdown when per-capita incomes range between $10,000 and $11,000, and experience a second slowdown when per-capita incomes range between $15,000 and $16,000.

Third, the drivers of India’s growth will shift over the next 26 years. Eichengreen, Park and Shin found

that the determinants of economic growth change as a country’s per-capita income levels get higher. When a country’s per-capita income levels are low, the main drivers of growth are demographic variables—such as the male-female population ratio and the share of the population that is of working age—and financial efficiency variables like the gap between the deposit and lending rates. When a country’s per-capita income levels are high, demographic and financial efficiency variables do not matter much. Instead, the main drivers of growth become the ability of countries to avoid a banking or financial crisis, the size of government debt (as a percentage of GDP) and the composition of foreign capital (FDI versus portfolio flows).

Clearly, the quality of India’s fiscal and monetary management will take on greater importance over the next 26 years. The experiences of other countries offer important lessons.

Also read: Why Modi govt needs to reconsider spending on physical rather than social infrastructure

The Korean miracle

Figure 2 displays the per-capita GNI for South Korea between 1992 and 2021. It is evident why South Korea has been called the ‘Miracle on the Han River’. In the 30-year period between 1992 and 2021, South Korea’s per-capita GNI grew at an annual rate of 5.3 per cent!

Growth has been interspersed with sharp downturns. The first downturn occurred in 1998 during the Asian financial crisis when per-capita GNI plunged by 23 per cent. The second downturn occurred during the Great Recession of 2008-09 when per-capita GNI fell by 7.5 per cent and the third downturn after the onset of the Covid pandemic in 2020 when per-capita GNI fell by 2 per cent. In each instance, the recovery was quick.

Examining the many explanations for South Korea’s economic miracle, Noland (2011) emphasises South Korea’s high exposure to international trade and capital flows because it served as a gauge for identifying industries and firms worthy of industrial policy support. In the 1960s and 1970s, South Korea’s exports (food, textiles, shoes, wigs, etc.) were labour intensive. Today, South Korea’s biggest exports are technologically intensive (autos, hardware, software, etc.).

Illustration by Ramandeep Kaur | ThePrint

Unlike South Korean firms, India’s firms have been shielded from the full force of international competition. Consequently, Indian firms are less dynamic than South Korean firms (as well as firms from China, Malaysia and Thailand).

Adjusting for GNI size, India has fewer large firms (with upwards of $1 billion in annual revenues) and mid-size firms (with revenues between $50 million and $1 billion) than several other countries. Studies by the McKinsey Global Institute (MGI) have shown that India has a “missing middle” of small and mid-size firms that develop distinctive capabilities, grow rapidly, and compete vigorously against domestic and international competitors.

Taking a leaf from South Korea’s playbook, Indian policies should be more pro-market by encouraging free and fair competition.

Also read: India’s GDP has turned around but structural problems remain

The Brazilian stagnation

As a contrast to the South Korean growth story, Figure 3 illustrates Brazil’s per-capita GNI between 1992 and 2021. Brazil is a textbook example of a country that has fallen into the “middle-income trap”—the failure to transition from a middle-income country to a high-income country.

Over the last 30 years, Brazil has experienced two growth surges but it has also experienced two prolonged periods of decline. Its first growth surge from 1993 to 1997 followed the adoption of a new currency that ended a decade of hyperinflation while its second growth surge from 2003 to 2013 was aided by an international commodities boom.

Illustration by Ramandeep Kaur | ThePrint

Both periods of decline (1998 to 2003 and 2013 to the present) have been persistent and have led to 40 per cent+ declines in per-capita GNI.

Sabatini (2016) attributes Brazil’s failures to bad governance at multiple levels—an unwillingness to undertake vital structural and fiscal reforms, underinvestment in education and health, and an aversion to free trade and competition. Stefan Zweig’s proclamation in 1941 that Brazil is the “country of the future” is, ironically, still true.

Governments are often criticised for being profligate. India, in contrast, could be criticised for underinvesting. For instance, India’s expenditures on education (4.5 per cent of GDP in 2019) and health (3 per cent of GDP in 2019) have been consistently below the corresponding levels in many countries. For comparison, Brazil spent approximately 6 per cent of its GDP on education and 9.5 per cent of GDP on health in 2019. On the revenue side, the Goods and Services Tax (GST) is a landmark achievement that has simplified India’s complex system of indirect taxation and expanded the number of registered taxpayers. Its efficacy will be more fully revealed in the years to come.

Also read: India@75 is a patchy story. But it has 25 years to fix things and make it an Indian century

India needs to go for open trade

India is likely to join the ranks of MICs in the 2030s but will not have a per-capita GNI that is comparable to that of upper MICs for 25+ years. Whether India can hit these two milestones will depend on many variables and events. The two pertinent questions are: One, can Indian policymakers avoid policy errors (of both omission and commission)? Two, will economic conditions in the rest of the world be conducive to economic growth?

India will do well to emulate many of South Korea’s pro-growth policies. Among them, the one policy that India must adopt—if it is to achieve its growth milestones—is South Korea’s policy of relatively free and open trade. By exposing firms to ideas from across the world, and by subjecting them to the highest standards of competition, India can, like South Korea did earlier, enable the creation of legions of world-class companies.

Ram Shivakumar is a Professor of Economics & Strategy at the Booth School of Business at the University of Chicago. Views are personal.

(Edited by Neera Majumdar)