Can India exit the middle income trap ?

Today DINESH KUMAR KAPILA shared this excellent article by Dr. RATHIN ROY

https://economictimes.indiatimes.com/opinion/et-commentary/stuck-in-the-middle-forever-action-to-recognise-avoid-overcome-perils-of-middle-income-trap-has-to-be-made-policy-focus/articleshow/113675767.cms?from=mdr

In this article Dr. Roy shared his concerns about India being able to exit the infamous middle income trap (MIT). He makes reference to the recent World Bank report titled ‘World development report 2024 – The Middle Income Trap’.

Here are a few excerpts from Dr. Roy’s article.

India is a lower-middle-income country with a per capita income of $2,700 with aspirations of transitioning to high income status which means a per capita income of more than $14,000.

The India story since 1991 has delivered great prosperity for the top 150 mn of its population. This has reached its limits because we're unable to craft a strategy that extends this to the next 200-300 mn people. As a consequence, there has been a sharp increase in inequality of every kind - income, consumption, geography, wealth, gender and inheritance.

The Great Indian Plain is 250-350% poorer than peninsular India. The latter has health and education outcomes that match upper-middle-income countries, while the former languishes at Burkina Faso levels. 75% of our population earns just $5 a day. Every year, for every 10 people who escape poverty, 6 who weren't poor, fall into poverty.

?All this manifests in the quality of India's growth story. Leading indicators of the economy are all about what the richest 200 mn consume. The five sectors that produce what half our population should be able to consume, without subsidy, at affordable prices are economic failures.

Agriculture, where we subsidize food for 800 mn people; textiles, where we make shirts for the rich but import shirts for common people from Bangladesh and Vietnam.

The MIT experience of other countries tells us that our growing richer will be inhibited with three terrible consequences.

- We will, like Egypt, Brazil and Turkiye, never be ‘viksit’.

- A quarter of our citizens will enjoy prosperous lives equivalent to those in rich geographies, while the majority and their children will face the same development gaps their forefathers did when India was a poor country.

- Regional ethnic and gender dimensions of this will challenge the unity and integrity of India far worse than Pakistan or China can ever do.

He also quotes from the World Bank Report

The typical fate of a middle-income country is to stay there and not achieve high-income status. Only a handful of (mainly) small European countries and petrostates have made this transition since 1990.

In many middle-income countries, descendants of political elites are involved in and consolidate resources through politics.(pg 144)

'Efficient firms do not expand, and inefficient firms do not exit the market in India, Mexico, and Peru' (pg 47).

A rather gloomy picture but what is the way forward ? This question should agitate all of us. The World Bank report provides some pointers. I plan to study that and write about it later. For now I would just want to reflect on one point that Dr. Roy makes, that intrigued me.

We make shirts for the rich but import shirts for common people from Bangladesh.

Here are some facts.

This is a figure from an old post by Atulkumar Singh

Imports of garments from Bangladesh to India in 2022 was $ 710 million.

In 2023 this figure was about the same.

India imported $425.38 million worth of non-knit or crocheted apparel and $236.66 million worth of knit or crocheted apparel from Bangladesh.

Here is an excerpt from a recent TOI report.

‘As per the association of the textile industry, the rise in imports from Bangladesh has led to a decline in domestic production over the years, which has resulted in revenues loss or the industry and situation is getting worse over time.

Knitwear Club president Vinod Thapar said, “The labor cost is very low in Bangladesh as compared to India. Besides, their quality is also better than the domestic industry. Despite that the local industry has the strength to compete with them. But we need the intervention of the Union government to make us more competitive and undertake initiative to improve production quality of the domestic industry, besides setting up some mechanism to restrict the import from Bangladesh.”

He informed that the annual production of the total 15,000 registered units of textile industry in Ludhiana is Rs 20,000 crore. “Of the total production, only 25% is exported. The major export destinations are Middle East countries,” he said.’

Dr. Roy in his recent interview with Karan Thapar made raised an interesting related point. Labor rates may be high in Tamil Nadu but they are low in UP. So why can’t we make low cost garments in UP. He said he does not know the answer. I don’t know the answer either. But I do believe that given the right approach the textile industry in India has a huge untapped potential for job creation.

This excerpt from a recent TOI news item about a Bazar Sarkar initiative by the knitwear industry in Ludhiana provides some inspiration.

Ludhiana: The first common facility centre (CFC) for ready-made manufacturing is turning into a blessing for the ailing textile and garment industry, especially for micro, small and medium enterprises, as they get access to latest technology and upgraded machinery and equipment. The development is helping garment manufacturers improve productivity, quality and competitiveness in the sector, and it is being seen as a big infrastructural push for the industry. The textile cluster named Integrated Apparel Technology and Facilitation Centre (IATFC) started functioning here recently. The members of the cluster are getting processes like knitting, stitching, laser engraving, and computer aided manufacturing done from here on subsidised rates, while non-members also have access to state-of-the art machinery on market rates. There are 32 members of the cluster. The centre was set up by a group of entrepreneurs at Jaspalon village on Ludhiana-Delhi highway with the financial help of the Union ministry for MSMEs and state government. Out of the total amount Rs 14.5 crore spent on the centre, 80% was borne by the central government, while state government provided 10% financial assistance. The remaining amount was contributed by the member entrepreneurs. Officials of the department of industry and commerce said the central government, under its Micro and Small Enterprises Cluster Development Programme (MSE-CDP), has provided a grant of Rs 11.6 crore while the rest of the amount was contributed by the state government and members of this cluster. Rajesh Gupta, vice president of Knitwear Club and CEO of IATFC, said, “The cluster was the need of the hour for survival of the industry in Ludhiana. Members of the cluster can use machines installed at center by paying up to 15% less than market rates. The cluster is providing a conducive environment to micro, small and medium-sized manufacturers Machinery at the center is not available anywhere in the region.”

Coming back to Dr, Roy’s point of why can’t we make low cost garments in UP ?

Let us do a thought experiment to attempt an answer.

UP has 8 crore people registered on the e Shram portal. And our objective is to draw up a high level plan to create 8 crore garment manufacturing jobs in UP.

So the first question is what funding will we need. For reference a sewing machine would cost about $100. We add another $100 for ecosystem support, So $200 per job. Based on this we will need ?about $16 billion.

Next question is where do we find the money?. We are planning to spend $25 billion on PLI for semiconductor manufacturing which will create say about 50,000 jobs. If we prioritize job creation we can redirect the resources here,

Next question would be how do we deploy this fund?. We can set up the fund as an employment generation impact fund run by a NSDC type organization led by eminent people.

This may sound like a rather silly plan, but the hope is to get us all to think about alternative pathways.