It was about time someone brought the ‘middle income trap’ risk back to the front and centre of the discourse on the Indian economy. There are few better than Rathin Roy to have done it, not just because he is one of India’s finest macroeconomists. That he is a member of the Prime Minister’s Economic Advisory Council (PMEAC) makes this an admission of sorts by the establishment, adding some gravitas to the discourse. (He is also the Director of National Institute of Public Finance & Policy, a think tank which influences India’s fiscal policy making). This comes at a time when pretty much every data point – macro or micro, over the past two quarters is pointing towards a slowdown in the only engine that has been firing the Indian economy over the past decade – consumption. Roy reckons there are structural reasons behind this which if not rectified soon can pose a serious risk that India will remain a lower middle income country or get caught in the so called ‘middle income trap’ like Brazil or South Africa and will never become another China or South Korea. He says “In the history of the world, countries have avoided the middle income trap, but no country — once caught in it — has ever been able to get out,”
“…The World Bank’s lower middle income range for countries is defined as per capita gross national income (GNI) of between $996 and $3,895. As per 2017 figures, the income of an average Indian was in the vicinity of $1,795, which placed the country well below the halfway mark, data from Bloomberg shows.
During the same period, the comparable figure for China stood at $8,690, which put it well above the halfway mark in the upper middle income range — defined as GNI per capita between $3,896 and $12,055.
Roy said that the 10 crore Indian consumers who have so far been powering India’s growth story are now beginning to plateau out. He called it an early warning: since 1991 the economy has been driven not by exports but by what these 10 crore consumers wanted to buy.
The risk, Roy said, now runs deeper; the possibility that India will remain stuck at the middle income range has now started appearing more and more real, which indicates India will never be another China or South Korea but could begin replicating basket cases like South Africa or Brazil where large swathes of poor population are powering not growth, but crime.
…And it’s not just Rathin Roy. Even the Ministry of Finance, in its Monthly Economic Report of March 2019, had shed ample light on the current scenario. “India’s economy appears to have slowed down slightly in 2018-19. The proximate factors responsible for this slowdown include declining growth of private consumption, tepid increase in fixed investment, and muted exports,” it had warned.
…And what does Roy think of the claim about India being the world’s fastest-growing economy? India certainly is currently the world’s fastest-growing, but this is not the fastest growth in India’s history, he says, adding an interesting aspect to the debate — he thinks India is fastest only because China is not currently the fastest.
A growth rate of 6.1-6.6 per cent is not bad, but consumption slowdown is going to put that under threat, Roy warned: “A time will come when that will stop.”
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Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.
Copyright © 2022 Marcellus Investment Managers Pvt Ltd, All rights reserved.
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