Can India get rich before its population ages?

Over the past two years, Prime Minister Narendra Modi has pledged to transform India into a high-income developed country by 2047. India is also on track to become the third largest in the world economy in six years, according to several projections.

According to the World Bank, high-income economies have a gross national income per capita (the total amount of income earned by a nation’s people and businesses) of $13,846 (£10,870) or more.

With a per capita income of around $2,400 (£1,885), India is one of the least developed countries. Middle-income countriesFor the past few years, many economists have been warning that the Indian economy could be heading towards a “middle-income trap.”

This phenomenon occurs when a country ceases to easily achieve rapid growth and compete with advanced economies. Economist Ardo Hannson defines this phenomenon as a situation in which countries “seem to be stuck in a trap where costs are rising and competitiveness is falling.”

A new World Bank report raises similar concerns. At current growth rates, India will need 75 years to reach a quarter of the per capita income of the United States. World Development Report The report also said that more than 100 countries – including India, China, Brazil and South Africa – face “serious obstacles” that could hamper their efforts to become high-income countries in the coming decades.

The researchers looked at figures from 108 middle-income countries, which account for 40% of global economic output and nearly two-thirds of global carbon emissions. They are home to three-quarters of the world’s population and nearly two-thirds of those living in extreme poverty.

These countries face greater challenges in breaking out of the middle-income trap, including rapidly ageing populations, rising protectionism in advanced economies and the urgent need for an accelerated energy transition.

“The battle for global economic prosperity will be largely won or lost in middle-income countries,” says Indermit Gill, World Bank chief economist and one of the study’s authors.

“But too many of these countries are relying on outdated strategies to become advanced economies. They are depending too long on investment, or turning prematurely to innovation.”

For example, the pace of business growth is often slow in middle-income countries, researchers say.

In India, Mexico and Peru, companies that have been in business for 40 years typically double in size, while in the United States, their growth increases sevenfold over the same period. This indicates that companies in middle-income countries struggle to grow significantly, but still survive for decades. As a result, nearly 90% of companies in India, Peru and Mexico have fewer than five employees, and only a small fraction have 10 or more, the report said.

Mr Gill and his fellow researchers are advocating a new approach: these countries must focus on more investment, integrating new technologies from around the world and developing innovation.

South Korea exemplifies this strategy, the report says.

In 1960, its per capita income was $1,200; it rose to $33,000 in 2023.

Initially, South Korea encouraged public and private investment. In the 1970s, it adopted an industrial policy that encouraged domestic firms to adopt foreign technologies and advanced production methods.

Companies like Samsung responded. Originally a noodle maker, Samsung began producing televisions for domestic and regional markets by purchasing technology licenses from Japanese companies.

This success created a demand for skilled professionals. The government increased budgets and set targets for public universities to develop these skills. Today, Samsung is a global innovator and one of the world’s largest smartphone makers, the report said.

Countries such as Poland and Chile have followed similar paths, the report says. Poland increased its productivity by adopting Western European technologies. Chile encouraged technology transfer to spur local innovation, adapting Norwegian salmon farming techniques to become a leading salmon exporter.

History gives us ample clues about the impending middle-income trap. Researchers reveal that as countries get richer, they often find themselves in a “trap” around 10% of U.S. GDP per capita ($8,000 today), which puts them in the middle-income bracket. That’s roughly the middle of what the central bank classifies as “middle-income.”

Since 1990, only 34 middle-income countries have moved up to high-income status, with more than a third of them benefiting from integration into the European Union (EU) or new oil reserves.

Economists Raghuram Rajan and Rohit Lamba separately estimate that even with a very respectable 4% per capita income growth rate, India’s per capita income will not reach $10,000 until 2060, which is lower than China’s current level.

“We need to do better. Over the next decade, we may see a demographic dividend—an increase in the share of our population that is of working age—before we succumb, like other countries, to ageing,” they write in their new book Breaking The Mould: Reimagining India’s Economic Future.

“If we can create good jobs for all our young people, we will accelerate growth and have a chance to become comfortably upper middle class before our population begins to age.”

In other words, economists are asking: “Can India get rich before it gets old?”

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