Economist warns: India risks middle-income trap

India's impressive GDP growth rate masks underlying economic fragilities, according to economist Dr. Aurodeep Nandi. He warns that without a substantial increase in domestic demand and significant investment in research and development, the nation risks becoming ensnared in the middle-income trap.

Nandi highlights that the current economic expansion is largely fueled by consumption among the wealthiest and by services exports. This contrasts with manufacturing, which has remained stagnant as a percentage of GDP for years, and private investment, which has not responded robustly to recent policy initiatives.

The economist draws a stark comparison with China, noting that while both countries had similar per capita incomes in 1990, China has since surged ahead due to its focus on escaping the middle-income trap. India, with a significantly lower per capita income, has yet to achieve the necessary structural changes for sustained, widespread prosperity.

Furthermore, Nandi points to India's limited involvement in critical global value chains, such as AI development and semiconductor manufacturing, as a reason for foreign capital hesitancy. He argues that chronic underinvestment in R&D is a core issue, threatening even the strength of India's services exports in the long term as AI reshapes global IT delivery.

Despite these concerns, Nandi sees optimism in premium consumption sectors and suggests that fears of El Niño significantly disrupting the rural economy might be overstated. However, he emphasizes that building a durable economic future requires confronting these structural challenges more directly than the headline GDP numbers indicate.