Note4Students
From UPSC perspective, the following things are important :
Mains level: Middle-income trap;
Why in the News?
Ahead of the Union Budget, the Congress released a report on January 30, 2025, saying that India is at risk of getting stuck in the middle-income trap.
What is the classification of Countries given by the World Bank?The World Bank classifies countries into four income groups based on their Gross National Income (GNI) per capita.
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What factors contribute to India being at risk of falling into a middle-income trap?
- Low GDP Growth: India’s projected GDP growth rate for 2024-25 is around 6.4%, significantly lower than the 8% needed to leverage its demographic dividend effectively, indicating a slowdown in economic momentum.
- Food Inflation Concerns: Despite the overall decline in inflation, food inflation remains a challenge, rising from 7.5% in FY24 to 8.4% in the same period due to supply chain disruptions and adverse weather conditions.
- Private Sector Investment: Despite corporate tax cuts, private sector investment has not significantly increased. The Economic Survey 2024-25 indicates that Gross Fixed Capital Formation (GFCF), a crucial indicator of investment activity, slowed to 5.4% in the recent quarter, reflecting a decline in private capital expenditure.
- Government Capital Expenditure: The survey notes that government capital expenditure utilization was only 37.3% in the first half of FY25, down from 49% the previous year, which has contributed to the overall slowdown in investments.
- Low Incomes: A significant portion of India’s population lives on extremely low incomes, with estimates suggesting that about 50% of the population earns between ₹100 and ₹150 per day. This level of income severely limits consumer spending capacity and economic growth potential.
How does the current economic policy framework address the challenges? (Way forward)
- Next-Generation Reforms: The Union Budget 2024-25 emphasizes “Next Generation Reforms” aimed at enhancing productivity and market efficiency across various sectors.
- This includes a comprehensive Economic Policy Framework that focuses on improving factors of production land, labour, capital, and entrepreneurship while leveraging technology to reduce inequality and boost economic growth.
- Deregulation and Economic Freedom: The Economic Survey highlights the need for deregulation and grassroots reforms to enhance the competitiveness of the economy. It advocates for greater economic freedom, allowing individuals and organizations to pursue legitimate economic activities without excessive regulatory burdens.
- Public-Private Partnerships and Infrastructure Investment: The framework encourages public-private partnerships (PPPs) in infrastructure projects, facilitating greater collaboration between the government and private sector.
- By removing policy hurdles and providing upfront support for long-term projects, the government aims to attract patient capital necessary for sustainable development, which is critical for addressing current economic challenges
Mains PYQ:
Q Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments. (UPSC IAS/2019)
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