India aims to achieve ‘Viksit Bharat’ by 2047, transitioning from middle to high-income status. To sustain its growth, it must avoid the middle-income trap that has hindered many developing nations. The World Development Report 2024 suggests a three-step strategy to avoid the middle-income trap: prioritizing investment, integrating global technology, and fostering innovation. Here’s a look at how India can achieve this

India stands at a pivotal moment in its economic evolution, with sky-high ambitions to catapult its global standing. By 2047, the nation aims to shed the ‘developing’ tag and achieve ‘Viksit Bharat’—a bold vision to mark the centennial of its independence. The target over the next few years: Reaching a $5 trillion GDP in the next three years, scaling to $7 trillion by 2030, and becoming the third-largest economy in the world, overtaking both Japan and Germany.

With the help of initiatives like ‘Atmanirbhar Bharat’ and ‘Digital India,’ the country is gearing up to become a global manufacturing powerhouse, in a bid to transition to the upper-middle-income category. However, there is one thing India must do to proceed on its upward trajectory—and that is avoid falling into the middle-income trap. It’s a trap that has thwarted the progress of many developing nations striving to advance to high-income status. Notably, since 1990, only 34 middle-income economies have managed to shift to high-income status. According to the World Bank, over a third of them benefited either from joining the European Union (EU) or from newly discovered oil reserves.

In 2007, the World Bank published An East Asian Renaissance: Ideas for Economic Growth—the report that coined the phrase “middle-income trap.” It refers to a situation where a country after experiencing rapid growth and reaching middle-income status, struggles to transition into a high-income economy. This happens when the factors that drove initial growth—such as cheap labor and capital accumulation—begin to diminish in effectiveness, and the economy fails to adapt through innovation, productivity improvements, or higher value-added industries. Lessons from the past 50 years show that as countries grow wealthier, they usually hit a “trap” at about 10% of annual US GDP per person—the equivalent of $8,000 today. That’s in the middle of the range of what the World Bank classifies as “middle-income” countries.

As per the recently released World Bank’s report titled, ‘World Development Report 2024: The Middle Income Trap’, it may take India close to 75 years, China more than 10 years, and Indonesia nearly 70 years to reach one-quarter of the United States’ income per capita. By 2023-end, 108 countries with a total population of six billion (75 percent of the world) were classified as ‘middle-income’. They each had annual GDP per capita between $1,136-13,845. They account for nearly 40 % of global economic activity, more than 60 percent of people living in extreme poverty, and more than 60 percent of global carbon dioxide (CO2) emissions, the report said.

For India, the challenge is how to sustain growth and avoid this trap, and India is not alone in facing this challenge. The middle-income trap has ensnared numerous developing countries over the years. Out of 108 developing nations, many are still stuck in the middle-income range without achieving significant growth. The governments of countries like Bangladesh, Brazil, Indonesia, Mexico, Morocco, South Africa, Türkiye, and Vietnam, among others, are all hoping to reap the full benefits of their strong economic potential.

In some of these countries, aging populations, slowing productivity, and reliance on low-wage manufacturing have hindered progress. Compounding these difficulties are major global challenges such as rising protectionism and the urgent need to tackle climate change and transition to clean energy. Here’s a look at three major challenges that India needs to tackle on a priority basis.

Many developing nations that once boasted youthful demographics are now facing rapidly aging populations, and therefore labor shortages and increasing social welfare costs. However, India, with a median age of just 29, has time to reap the demographic dividend till 2050. India needs to capitalize on its young workforce. And this is possible only if there is heavy investment in health, education, productivity-enhancing technologies, upskilling the youth, and closing the gender gap.

The rise of protectionism in advanced economies, particularly in the United States and parts of Europe, poses another challenge for countries like India. Tariff wars, stricter trade regulations, and an emphasis on onshoring industries are reshaping global trade dynamics. For India to become a manufacturing hub under the Make in India initiative, it must navigate this increasingly protectionist environment. Diversifying export markets, boosting domestic consumption, and improving trade relations with emerging markets in Africa and Southeast Asia can help mitigate the risks posed by protectionism.

The global push toward decarbonization and renewable energy is the third major challenge. For many middle-income countries, including India, the need to transition to cleaner energy sources can be financially and logistically daunting. Fortunately, India has made significant strides in solar energy and other renewables, but the scale of the energy transition required remains enormous.

To escape the middle-income trap, countries must focus on a comprehensive development strategy. The World Development Report 2024 recommends a “3i” strategy—Investment, Infusion, and Innovation—to help countries move forward.

For a country like India, investment in infrastructure, education, and healthcare is crucial to boosting productivity and supporting long-term growth. Infusion refers to adopting and integrating new technologies to enhance productivity and competitiveness. In India’s case, digital adoption has been rapid, but there is still room for further technological infusion, particularly in manufacturing and agriculture.

Once a middle-income country has begun to exhaust the potential of infusion in the most promising parts of its economy—running out of technologies to learn and adopt—it should expand its efforts to become an innovation economy, recommends the report. After all, moving from a labor-intensive, low-wage economy to a high-income economy requires countries to shift from copying technologies to creating them. The good news is India already has a growing tech and startup ecosystem. By investing in new technologies, encouraging entrepreneurship, and fostering innovation, India can build industries of the future.

While these strategies might seem challenging, several countries have successfully escaped the middle-income trap, showing that it is possible—South Korea offers one of the most remarkable success stories. Once a war-torn, agrarian economy in the 1960s, it transformed into one of the world’s most prosperous and innovative nations, achieving this feat by focusing on export-led growth, investing heavily in education, and driving technological innovation. Giants like Samsung and Hyundai, which started as small local firms, now dominate the global market, epitomizing the country’s meteoric rise.

With a strong focus on education, innovation, and EU integration, Poland avoided the middle-income trap by enhancing productivity and developing a diversified, knowledge-based economy. Chile, though a smaller economy, became the first Latin American country to reach high-income status. Its focus on macroeconomic stability, investment in human capital, and diversification of exports has helped it become one of the most stable and prosperous countries in the region.

India’s aspirations are grand, but they are not unattainable. India is well-positioned to avoid the middle-income trap, provided it takes bold steps toward structural reforms, fosters a culture of innovation, and leverages its demographic dividend. Learning from other nations’ experiences, while charting its own path, will help India achieve its vision of becoming a global economic powerhouse.