The World Bank classifies countries on the basis of gross national income (GNI) per capita for 2021, in US dollars at current prices and market exchange rates, into four groups: low income, less than $1,050; low-middle income, $1,050-$4,100; upper-middle income, $4,100-$12,700; and higher income, over $12,700. In 2021, India’s GNI per capita stood at $2,170, placing it in the lower-middle-income group. In comparison, other large developing countries had much higher GNI per capita, $11,890 in China, $9,380 in Mexico, $7,720 in Brazil and $4,300 in Indonesia, all in the upper-middle income group. In contrast, in the high-income group, the US had a per capita GNI of $70,340 and even higher in some smaller countries. The average GNI per capita was $47,900 in high-income countries and $12,070 in the world. Clearly, India has miles to go.
India can attain the status of a developed country in 2047, if by then it is in the high income group. For this, its per capita GNI would need to increase from $2,170 to $12,700 at constant prices by 2021, which would require a 7% per year increase in real per capita income over the next 25 years. India’s population will also increase greatly for this period, as its size is projected to stabilize only in 2045. Thus, given the population growth, the increase in national income, in the real period, would be about 8% per annum. Adjustment for inflation is necessary but not sufficient as the rupee may depreciate against the US dollar. If the rupee depreciates by 25% or 50% during 2022-2047, the required increase in per capita income (and national income) will be increased by one or two percentage points, respectively.
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Still, it highlights the power of compound growth rates. If per capita income and national income increase at the rate of 7% per annum, then both will double every 10 years. However, evolution is not just about arithmetic. Actually, it’s about more than economics.
The economic determinants of potential growth suggest that India may be able to sustain a high rate of economic growth for the next 25 years for four reasons. Our vast population is expected to increase further in size, which makes labor a source of growth, but only if it is incorporated into employment, and income levels are low, meaning that the potential for growth is high. Demographic characteristics, especially the high proportion of young people in the population, which will mean that the increase in workforce and savings rates for some time to come, is conducive to growth, provided we can harness the demographic dividend through education, Which builds capacities among the people. People. Wages are quite low as compared to the outside world, which will be an important source of competitive advantage in times to come. Our social infrastructure for health care and education, as well as physical infrastructure, remain underdeveloped despite modest progress, so further reforms are bound to reinforce the pace of development.
However, the opportunities are combined with formidable challenges. The most important of these is the combination of India’s persistent poverty, growing inequality and jobless growth. Of course, if growth continues, absolute poverty in India could be at a minimum by 2035. But the problem of growing inequality and inadequate employment opportunities, unless addressed, will escalate. The challenge is not only economic. It is social and political as well. And, ultimately, economic growth can be sustained if it eradicates poverty and reduces inequality. Such inclusive growth that creates jobs is the only way forward in the pursuit of developed-nation status. It will mobilize our most abundant resources, people, to accelerate growth from the supply side, and to fuel growth through income generated on the demand side.
Another challenge in this quest is to avoid the middle-income trap. As India transitions from low-middle- to upper-middle income status, it risks being trapped there, unable to move from upper-middle-income to high-income status. Many countries have fallen into this trap. The first stage of this process is driven by abundant cheap labor and high investment rates. Growth slows down as the effects of these factors decrease. And industrialization stops at labour-intensive goods as wages rise. The second phase of the transition requires higher productivity levels and the ability to innovate. In turn, there is a need to nurture technological capabilities, promote vertical diversification in production processes, encourage technological up-gradation, induce techno-learning and build R&D capacity.
My book Resurgent Asia (Oxford University Press, 2019) states that India’s share of world GDP will be around 16% in 2040, returning to its level in 1820, when it was 16%. Macroeconomic forecasts of GDP at market exchange rates show that by 2050, China, the US and India will be the world’s three largest economies. These estimates, based on specified estimates and statistical extrapolation, are also due to the size of the population of India. However, achieving developed-nation status by 2047 will depend on high growth rates that will be sustainable only if economic growth creates jobs that eradicate poverty and reduce inequality. And, even if India becomes a high-income country in 2047, its per capita income will still be one-sixth to one-fourth that of the US and Europe.
Deepak Nayar is Emeritus Professor of Economics at Jawaharlal Nehru University.
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