How Can Gujarat Defy the Middle-Income Trap?

08 Feb 2024

Opinion: Poonam Gupta.

Gujarat has consistently ranked among the fastest growing States in India. According to the World Bank’s income group classifications, the state is on the verge of achieving high middle-income status.

Three key features characterize Gujarat’s remarkable growth process.

First, growth in the State has been diversified across sectors. Instead of being confined to a manufacturing versus services-led debate, its growth has been led by both the sectors. Further, even its agriculture sector has outpaced the national average.

During the pre-COVID Decade, its agriculture, services, and manufacturing sectors grew by 6, 8, and 11 percent annually, as compared to the national averages of 4.4, 7.7, and 8 percent, respectively. At 37 percent, Gujarat boasts of nearly the highest share of manufacturing in its economy amongst the States currently.

Second, growth in Gujarat has been accompanied by rapid improvements in most indicators of human capital and quality of life.

Its literacy rate has increased from 69 percent to 78 percent between the last two Census rounds, surpassing the national average. Life expectancy is 71 years, at the same level as the national average. Its infant mortality rate declined from 41 to 23 deaths per 1000 live births between 2011 and 2020, below the national average; and the percentage of fully immunized children has rallied close to the national average, at 76 percent.

As regards the basic amenities of life, household access to improved drinking water sources and to electricity has increased to 98 percent and 97 percent, respectively. Household access to improved sanitation facilities has also increased from 44 percent to 74 percent.

Third, Gujarat stands out for its exceptional fiscal prudence.

Gujarat is one of the few States to have fully adhered to the targets laid down under the Fiscal Responsibility and Budget Management rule. It currently runs a modest primary deficit, a small fiscal deficit, and a revenue surplus. Its contingent liabilities have declined to negligible levels. Under most scenarios, its already low public debt is projected to decline further.

Interestingly, both its public expenditure and revenues as percentages of the State GDP, are smaller than those of an average State. This suggests that its government machinery is highly efficient in delivering its mandate.

All the above parameters have made the State an attractive investment destination. It is also ready to take the next leap into a higher orbit, escaping the trap that has afflicted a majority of middle-income economies around the world– a reference to the economic slowdown in countries at middle-income levels that hampers their transition to a high-income status.

What can Gujarat do to defy a middle-income trap? Some pointers:

1. It needs to devise a futuristic strategy for growth that entails investment in skills, entrepreneurship, a high-tech industry, and innovation. It ought to enhance the skills of its own people to make them future-ready, as well as attract the best talent from other States and from around the world. It should strive to build capabilities to garner a larger slice of the global market for goods and services that would be in demand during the coming years and decades.
2. Its indicators of gender parity pose a mixed picture. While its female participation in labour force has increased over time, and exceeds the national average, it remains below the numbers attained in other fast-growing middle-income countries. Besides, a very basic indicator of gender parity, the sex ratio in the age group 0-6 (measured as the number of females per 1000 males) in the State remained below national average until recently, and surpassed it only in the latest National Family and Health Survey.
3. With the content of services increasing across countries in both manufacturing processes as well as in final consumption, most modern path to prosperity traverse through a world-class services sector. The economies that are highly successful as manufacturing hubs need to become equally efficient in services, for the latter are increasingly becoming important determinants of the competitiveness of manufacturing. Gujarat will do well to assess and leverage its untapped potential in the services sector, encompassing–both traditional and modern segments.
4. Given its highly prudent fiscal stance, the State can afford to expand its fiscal envelope to make investments for the future. It can achieve this by increasing its own tax and non-tax revenues, which lag behind the average figures of the other States. If need be, it can run slightly higher deficits and borrow from the market at modest interest rates.

Gujarat has set an example in fiscal efficiency, economic growth, and socio-economic benchmarks. It should now aim to become an innovation hub to redefine its growth story and defy the prevalent middle-income trap, thereby becoming a role model for the entire country and even for the developing world.

See https://www.ncaer.org/PolicyBriefGujarat.pdf  for more details.

Jayanta Talukder contributed to this piece.