Why in the News?

• A recent analysis highlights structural weaknesses in India’s growth model and rising middle-class vulnerability.

What’s in Today’s Article?

• India’s Growth Model (Basics, Poverty Reduction, Limits of Poverty Measurement, Middle Class, Structural Issues, Sectoral Imbalances, Policy Implications, etc.)

India’s Growth Model and Poverty Reduction

• India’s economic growth over the last decade has been widely recognised for its success in reducing poverty.
• The proportion of people living below the World Bank’s lower middle-income poverty line has declined significantly from over 50% a decade ago to nearly 30% in recent estimates.
• This reduction has been driven by a combination of economic growth and the expansion of welfare programmes. Key enabling factors include:

• Improved delivery of welfare schemes such as subsidised food and direct benefit transfers.
• Expansion of financial inclusion through banking access.
• Strengthening of last-mile governance mechanisms.

• However, while poverty reduction is evident, it does not fully capture the broader picture of economic well-being.

Limits of Poverty-Based Measurement

• Traditional poverty metrics rely on a threshold approach.
• They classify individuals as either poor or non-poor based on whether their income crosses a fixed line. This method has two key limitations:

• It does not capture the quality of life above the poverty line.
• It ignores income volatility and economic insecurity.

• A World Bank perspective suggests shifting towards a “well-being spectrum” approach.
• This approach evaluates how far individuals are from achieving a reasonable standard of living rather than simply whether they are above or below a threshold.

Rise of a Vulnerable Middle Class

• India’s growth has led to a situation where many people have moved out of poverty but have not achieved economic stability.
• This has resulted in the emergence of a “vulnerable middle class”.
• These households are characterised by:

• Low and uncertain incomes.
• Limited savings and high exposure to shocks.
• Restricted access to quality education and healthcare.

• Crossing the poverty line, therefore, often marks entry into vulnerability rather than stability.

Structural Issues in Employment and Income

• India’s growth model reveals a disconnect between output expansion and employment generation.
• Growth has been concentrated in sectors that are capital-intensive or limited in labour absorption.
• Key structural concerns include:

• Less than 10% of workers are in formal employment with social security.
• Around 94% of informal workers earn below Rs. 10,000 per month.
• Real wages have remained largely stagnant despite productivity gains.

• This indicates that economic growth has not translated into stable income growth for the majority.

Sectoral Imbalances and Labour Shift

• A major concern is the weak performance of the manufacturing sector.
• Manufacturing has not expanded sufficiently to absorb the growing labour force. Between 2016 and 2021, the sector reportedly lost around 24 million jobs.
• As a result, many workers have moved back into agriculture.

• Agriculture employs nearly 46% of the workforce.
• It contributes only about 18% of total output.

• This mismatch reflects low productivity and limited income growth.
• The average farm household income remains modest, indicating persistent economic insecurity.

Inequality and Concentration of Wealth

• While a large section of the population remains vulnerable, income and wealth concentration at the top have increased.

• The top 1% accounts for over 22% of national income.
• A small group of billionaires holds a significant share of national wealth.

• This divergence highlights that growth benefits are unevenly distributed.
• It also reinforces the idea that poverty reduction alone is not sufficient to ensure equitable development.

Indicators of Economic Fragility

• Several indicators point towards growing economic fragility.

• Youth unemployment is around 45%.
• Graduate unemployment is close to 29%.

• This suggests that education is not translating into employment opportunities.
  • Household financial stress is also increasing.
  • Financial savings have declined to around 5% of GDP.
  • Household debt has risen, often driven by consumption needs.

• Human development indicators further reinforce this concern.
• India has high levels of child wasting and stunting, indicating long-term constraints on productivity and mobility.

Policy Implications and Way Forward

• India’s development challenge is evolving. The focus must shift from merely reducing poverty to enabling upward mobility.
• Key policy priorities include:

• Expanding labour- intensive manufacturing and MSMEs.
• Strengthening skill development aligned with market needs.
• Improving wage growth and linking it to productivity.
• Expanding social security for informal workers.
• Adopting broader measures of welfare beyond poverty lines.

• These steps are essential to convert economic growth into inclusive and sustainable development.