India needs to increase productivity in order to avoid falling into the middle-income trap

Joseph Stiglitz, a renowned economist, proposed the idea of "Intellectual Infrastructure," which aims to create a prosperous and forward-thinking society through innovation, factor efficiency, and "out of the box" thinking. This is essential for any nation that wants to quickly reach the position of a high income nation.

According to India, while the conventional strategy of investing in infrastructure, businesses, and fundamental healthcare and educational facilities can get the nation to the $5 trillion mark, reaching $10 trillion will call for a different strategy.

Even if just three nations have reached the $5 trillion and $10 trillion mark, India must still cater for 1.4 billion people while still maintaining a high standard of living.

India's nominal per capita GDP is just about $3,570 despite the country having a $5 trillion GDP, leaving it in the low middle income bracket for the foreseeable future. Indians can only receive a per capita income of about $7,140, or nearly $25,000 in terms of purchasing power parity, with a $10 trillion nominal GDP.

In order to escape the "middle-income trap," India needs continue its present rate of growth for at least 15 more years. Before India, nations like Brazil and Argentina attempted to break free from this iconic economic cleft-stick but were unable to reach the necessary escape velocity. This in turn explains why investing in traditional production elements can only advance a nation up to a certain point.

Therefore, India cannot escape these alleged constraints without concentrating on the unaccounted-for factors in GDP calculations that collectively account for the economy's Total Factor Productivity (TFP).

The TFP, which includes factors like R&D spending, manufacturing efficiencies, logistics, personnel skilling, and HDI-related components, is crucial in determining an economy's escape velocity. The traditional factors of production (TFP) do not include the TFP components; rather, they characterise the 'efficiency' with which the factors are used by an economy.

In other words, while traditional factors of production assist an economy get off to a good start and reach a critical scale, it is the efficiencies attained through factor productivity that have a substantial impact on the quality of life of the populace.

Without concentrating on the TFP, no nation has ever reached high income status, though there are some success stories as well. Though some think that factor productivity efficiency is a natural thing that the economy achieves as it develops, history teaches us that conscious efforts must be taken.

The nations that quickly understood the significance of TFP were those who were able to achieve high per capita income levels. South Korea is a fantastic illustration of how innovation, increased factor productivity, and both can help a country develop economically while also offering its people a good standard of living.

Ironically, South Korea didn't begin its industrialization process until 1953, when India already had some heavy industries and an impressive rail system.

South Korea joined the OECD in less than 40 years, but India remained stuck as a low-income, middle-income nation. The real boom occurred after 1980, when Seoul began to focus on R&D-driven high-tech sectors and invest in logistics and workforce skill development.

In fact, once the badly needed reforms took care of the economy's modernization and skill demands, South Korean 'Chaebols' like LG, Hyundai, and Samsung became cutting-edge global conglomerates.

According to the World Intellectual Property Organization's Global Innovation Index, South Korea has been one of the top performing nations since the 1980s, posting double-digit economic growth rates. Since the turn of the century, China has also jumped on board. By following successful models, it has not only avoided falling into the middle-income trap but also made significant strides in innovation and technology.

In an effort to avoid the middle-income trap, Turkey has also been experimenting with the "Intellectual Infrastructure" formula recently. Ankara has been investing extensively in training its workforce to generate high-tech industries, despite being late to the party. According to reports, Turkish consortiums have been heavily investing in teaching the local population high-tech skills through organisations like the "Turkish Technology Team."

While concentrating on the development of vital infrastructure and the accumulation of capital resources, Indian policymakers must understand the significance of factor productivity efficiency. Policymakers must immediately pinpoint the problems and implement solutions as India quietly increases its economic might and achieves superpower status. In the medium run, a delay in this area will harm India's ability to sustain its economy.

These efficiency improvements have been effectively used by South Korea, Israel, China, and Taiwan to their advantage and to create economies of scale. To fulfil the ambitions of its varied and young people, India must acknowledge this.