The middle-income trap is a clear potential for India: Kenneth Kletzer

Kletzer said India may be benefitting a little by being non-combatant in an increasingly worrisome world

India’s ambition to become a developed nation by 2047 may not be realistic but the country would have a higher per capita GDP by then, Kenneth Kletzer, professor of economics at the University of California told Ruchika Chitravanshi in an interview in New Delhi. Kletzer also said India may be benefitting a little by being non-combatant in an increasingly worrisome world. Edited excerpts:

 

How concerned are you about the ongoing West Asia crisis on oil prices and the competitiveness of trade, growth?

We're probably in an era where those kinds of shocks won't have large repercussions on economies. There can be a shock to oil prices. I don't expect a very large one. And, there can be consequences of that for countries like India, China, those dependent on oil imports, and maybe an inflationary shock in the West. 

The Economic Survey’s had suggested that India should open up to Chinese foreign direct investment (FDI) to increase manufacturing. We've not done that. What do you think of it? 

The protectionist reaction against Chinese investment in the United States now seems to be quite broad — out of who knows what kinds of fears. I like the Economic Survey’s suggestion which is to welcome foreign investment and easing restraints on foreign investment. It makes a specific point about China. China is the country with the opportunity, with technology.  India could benefit more from China’s technology. 

World over, we are seeing a rise in protectionism. 

The world is becoming a bit more protectionist. We've seen Trump. Of course, India did not get too much advantage out of the tariffs that came on China because they came with tariffs on India as well. India was hit with an adverse trade shock. I would expect the election of the Republican candidate to be a real trade shock for emerging markets.

India wants to become a developed economy by 2047 in terms of the GDP. How feasible is that?

It's not realistic. It's too high a growth rate to compound. If you sustain a 6-7 per cent growth rate, you will certainly rise up to the top of the middle-income group. The question is how long it will take for India to catch up to Greece, the bottom of the advanced economies. Sustaining that growth rate would be very unusual for a country. That's not something that China has achieved. 

How big is the threat for us to fall into the middle-income trap? 

The middle-income trap is a clear potential for India.

Has South Korea gotten into a middle-income trap? I'm not so sure. South Korea continues to grow, but slowing growth rates are what we see. South Korea has a fairly high per capita income now and has naturally started to converge towards the growth rate of others. I would expect by 2047 that India will have a higher per capita GDP. The stumbling point for the whole world, particularly a country like India, is that it might be exposed to climate change, notably in agriculture. 

The Indian economy is more skewed towards services than manufacturing. How do you see that? 

Every country has its potential. Even though manufacturing has taken amazing leaps in India, there still needs to be greater integration in the global supply chain. That integration has really just begun. Getting transportation within the country is not all that great yet, for goods. Can that kind of growth be sustained without advancing manufacturers more? And I can't make a prediction on that. Advancing manufacturers may be a real opportunity for India. 

So, you think without manufacturing, it will be difficult for India? 

You're losing part of the balance. India really excels in services and services could be vulnerable. It could be vulnerable to AI or AI could be a bust. That's an uncertainty.

What about tackling unemployment — we have recently launched an internship scheme. What do you think?  

That's a good idea. I don't know how much bang there will be for it. That's for a different kind of economist. In the United States, those kinds of programmes for displaced workers or adult workers have not been particularly beneficial. Unemployment is interesting in India. This does have much to do with skills and the quality of education. Building skills also starts early on. One of the things that labour economists, particularly Jim Heckman, have found in the United States is that people's success begins at birth and maybe before birth. That is the kind of thing that happens in nutrition and nurturing. 

What do you think of India’s fiscal consolidation process which would focus on debt-to-GDP ratio from FY26?

India does face potential consequences of high debt-to-GDP ratio. I don't think that India has a serious debt problem. I think it saw a rise in its debt because of Covid, like everybody else. Raising revenues in the near term is the kind of fiscal action that I would advocate. 

Improving revenue collection, broadening the base for direct taxes is also forward-looking. Also raising some attention are the state debts. This is where reform comes. The reforms should focus on how do we coordinate state debts with the Union debt and how do we control that potential contingent liability of the Union government.

India is often called the bright spot in the global economy. How do you see India’s role in the global economy?

India is a bright spot, partly because of not just an opportunity, but because of actually taking advantage of that opportunity in the last 20 years. India has followed a path more like China’s in opening up gradually. China has done quite well despite serious constraints on foreign investment. One thing to say is that India may be benefitting a little by being non-combatant in an increasingly worrisome world. When others are fighting wars, India has the advantage of trading with the United States and Russia. Maybe India has a different role to play than in the past.