- Late Convergence Stall refers to phenomenon wherein middle-income country that hopes to grow into high-income country fails to achieve its goal. Instead, it gets trapped in middle income status. (Middle Income Trap).
- India moved from a low income to lower middle-income country in 2008 and is now attempting to become upper-middle income country. However, this convergence may slow down for the late convergers like India, particularly after the global financial crisis (GFC).
The Economic Survey 2018-19 has highlighted four challenges:
- Backlash against Globalisation: Early convergers like Japan and South Korea posted higher growth rates during their periods of convergence due to export-led growth. However, adoption of protectionist policies by advanced economies post GFC makes convergence difficult for India.
- Thwarted structural transformation: Development entails shifting resources from low productivity (Agriculture) to high productivity sectors (Manufacturing) and from informal to formal sectors. However, share of manufacturing sector to India’s GDP has remained stagnant since 1991. Similarly, 90% of workers are employed as informal workers.
- Human Capital Regression: India underspends on Education, Health etc. which in turn adversely affects human capital formation. This makes it difficult for us to leverage disruptive technologies and focus on Industrial Revolution 4.0.
- Climate-Induced stress: Successful economic transformation takes place when resources move from agriculture to other sectors. This is possible only when agricultural productivity is higher. However, productivity of agriculture has remained quite lower. Going forward, climate change would further worsen the condition.
Indeed, India has registered higher growth rates in recent past. But this fast growth has occurred with limited transfer of labour from low productivity to high productivity sectors. As of now India may not be faced with a “Late Converger Stall” but need to act in time to avoid it.