Opinion

Take tech cheese to avoid the trap



The World Bank‘s warning that India and 100 other countries face a middle-income trap, where they will struggle to grow beyond 25% of US per-capita income, should reinforce public policy of the previous decade. The pathway out of the trap, from historical experience, is free markets and tech adoption. Indian companies must grow much faster than they have and become technology innovators to offer jobs to the country’s workforce before it starts shrinking.

This involves freeing up factor markets for land, labour and capital at an accelerated pace. Alongside, the government must push investment, its own and the private sector’s. The nature of public sector investment should prioritise skilling as industrial demand for labour rises.

This is broadly the playbook India has adopted, with limited success. Policymakers are aware of the window of opportunity presented by its demographic dividend, and, so, there is a sense of urgency in pushing the economy to take off during the next quarter-century.

Technology transfer can be speeded up by plugging into global manufacturing value chains. An ecosystem for growth is being created through public infrastructure, both physical and digital, for small enterprises. But progress on land and labour reforms has been slow. Stakeholders such as state governments and private investors are yet to come on board on the scale needed. This restricts capital flows into employment-generating businesses.

The pace of economic liberalisation since the 1990s no longer serves India. Although the previous decade has seen a significant improvement, it does not approach the escape velocity needed. Countries that have escaped the middle-income trap have compressed their economic transformation within a generation. The prospects of that happening in India are slim on account of its fractious politics. It would be a shame if the country does not make the effort while it has the chance. Greater effort must go into building the political consensus over deeper reforms.



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