India in ‘Middle Income Trap’

For the past 15 years, incomes of ordinary Indians – those between the top 15% and 50% of the population – are stagnating. The poorest 20% see a rise in incomes due to growing subsidies and handouts.

Over 120 mn people between 18 and 35 are neither in education nor looking for employment.

The population ’employed’ in agriculture is at its highest level, even as the share of manufacturing in GDP is at the lowest level in 30 years.

The default mode of production continues to be the informal and unorganised sectors.

The stock market story is not the India prosperity story In recent times, the stock market has risen despite an underlying structural slowdown because the share of profits in listed companies as a proportion of total revenue has gone up, while…

• Real wages are stagnant or declining.
• Supplier margins have been squeezed.
• Companies have used tax breaks and incentives to go debt-free.

That’s why profits are high even though investment is low. This can be expected to continue in the near future, although with more volatility given external shocks.

Aam aadmi housing is subsidised. This is because India suffers from shockingly low levels of productivity and lack of scale. So, the economy is unable to service the mass market demand of the ordinary Indian due to low productivity. Rent-seeking, not profit maximisation, is, therefore, the goal of most entrepreneurs.

A prosperous economy is one in which people move away from consuming cheap low-quality products produced in the informal sector to better-quality stuff produced in the formal economy.

The main activity of the Indian state since 1991 has been compensatory, not productive. The destitute are subsidised, but even ordinary people are not able to buy essential commodities with their own earnings without huge government subsidies for food, transport, housing and essentials.

Hence, the ability to deliver public investments and merit goods is choked as the state compensates the majority with subsidies and handouts for the failure to create universal prosperity.

All of the above are markers of a failed middle-income country. It is of particular concern that these markers are a feature of the Indian economy at such low levels of per-capita income. The situation is grim, but rectifiable.