Introduction

India's GDP growth has been on a rising trend since the early 1980s, after it broke away from the Hindu growth rate of 3.5 per cent per annum experienced between 1950 and 1980. In 2007, India graduated from being a low-income to a low-middle income country (according to the World Bank classification). In fact, India's recent GDP growth (see Table 2.1) has resulted in a dramatic decline in the absolute numbers of the poor, from 406 million in 2004–05 to 268 million in 2011–12 (as discussed in Chapter 1). However, in 2012–13 (the first year of the 12th Plan), the GDP growth rate fell to 5.5 per cent per annum, and further to 5 per cent in 2013–14. In fact, it resulted in the Planning Commission lowering its target for the 12th Plan period (2012–17), from 8.2 per cent per annum to 6.5 per cent per annum.

Since inclusion itself is dependent upon sustained GDP growth over the long term, this chapter focuses on the prospects for sustaining growth over the medium term. As argued in chapter 1 there is a mutually reinforcing reletionship between reduction of poverty, enhancement of human capabilities and sustained economic growth. The historical evidence from East Asia is that Japan, South Korea and Taiwan sustained rapid economic growth over at least a 15–20 year period, enabling them to move into the high-income category. China's poverty reduction has been very successful, precisely because, unlike any other country in the world, it has sustained GDP growth in excess of 7 per cent annually over 30 years between the early 1960s and the early 1990s (Lin, 2012). Of the countries that were independent and had middle-income status in 1960, almost three-fourths remained middle-income or had regressed to low-income by 2009 (Lin, 2012). The World Bank estimates that only 13 out of 101 middle-income countries in 1960 had become high-income economies in 2008. Given the recent decline in GDP growth rates in India, the legitimate question is: Is India going to avoid the middle-income trap, unlike most Latin American economies, which have been stuck in that trap for at least a quarter century?