Can India break free from the low income trap?

Reaching the upper middle-income status depends on sustaining high growth despite global and domestic headwinds.

February 2026 marked a quiet but significant turning point in India’s economic narrative. Two of the country’s most critical macroeconomic indicators – the Consumer Price Index (CPI) and the Gross Domestic Product (GDP) – were revised with a new base year.

At first glance, these may appear as technical adjustments. In reality, they signal India’s attempt to capture the contours of a post-pandemic, digitally driven economy, and to measure growth with sharper tools.

The new CPI series uses 2024 as the base year. Its basket has expanded from 299 to over 350 items, reflecting the diversification of consumption. Housing and services carry greater weight, while food’s share has been reduced – a recognition that urban households spend more on rent, healthcare, and digital services than on staples alone.

Crucially, the CPI now draws data from e-commerce platforms, acknowledging the rise of online consumption as a mainstream reality.

On February 27, the revised GDP series was released with 2022-23 as the new base year, the first year after Covid-19 disruptions. Methodological improvements include double deflation for manufacturing, integration of the 2023-24 Household Consumption Expenditure Survey, and reliance on administrative data such as GST filings, corporate reports, vehicle registrations, and digital payments.

The Ministry of Statistics and Programme Implementation (MoSPI) has also shifted to digital data collection with built-in validation, reducing lags, and aligning India’s practices with the United Nations’ System of National Accounts.

These revisions seek to reflect structural shifts in the economy over the past two decades: the rise of digital services, renewable energy, and new consumption patterns.

By modernising its statistical architecture, India is attempting to measure growth more accurately and, implicitly, to confront the question that has haunted policymakers: can the country finally escape the lower middle income (LMI) trap where it has languished since 2007?

The Union Budget FY27 rested on the growth projections from the Economic Survey 2025-26, rekindling optimism about India’s long-term trajectory.

The Survey indicated stronger performance in 2025, raising hopes that India could cross from LMI to join the upper middle income (UMI) status by 2037 and aspire to join the higher income (HI) status by 2047, the 100th year of Independence.

A State Bank of India study in mid-February projected a growth rate of 8.1% in Q3 FY26 – higher than the estimated 7.4%. Sustained growth at this pace could allow India to break free from the LMI trap earlier than expected, perhaps by 2030-2032.

The World Bank classifies countries with an annual per capita Gross National Income (GNI) of $1,135 or less as low-income (LI) countries. 

Countries with a GNI of $1,136-$4,495 are categorised as LMI countries, and those in the $4,496-$13,935 range as UMI countries. All other countries with incomes at $13,936 and above are designated as HI countries. India’s current per capita GNI of $2,600-$2,700 suggests a long climb ahead, but the trajectory is promising.

India’s persistence in LMI since 2007 contrasts with peers such as Brazil, China, Indonesia, Malaysia, and South Africa – all of whom have moved into UMI status. This comparative lag underscores the urgency of sustaining high growth.

Encouragingly, India’s pandemic recovery (2022-2025) drew praise from international funding institutions, hailing it as the fastest-growing major economy despite global headwinds.

The UMI goal

India’s ambition to reach UMI by the early 2030s is mathematically plausible. Yet optimism must be tempered by risks such as volatile oil prices, geopolitical shocks, global financial instability, and climate variability. The US-Iran conflict continues with no end in sight, causing crude prices to rise.

Domestically, the challenges are equally pressing – insufficient job creation, persistent informal employment, and widening rural-urban inequality. In agriculture, raising productivity through precision farming, mechanisation, and climate-resilient crops is vital.

Any such efforts would also result in a shift in employment to manufacturing and industry. Expanding agri exports and rural infrastructure could unlock new opportunities, but fragmented landholdings, water stress, and limited credit access remain challenges.

Manufacturing offers another pathway. ‘Make in India’ initiatives in electronics, semiconductors, EVs, and renewable energy equipment, supported by Production Linked Incentive (PLI) schemes, can integrate domestic firms into the global supply chains.

Yet, high logistics costs, skill gaps, and regulatory burdens on MSMEs need to be addressed. Industrial corridors, port infrastructure, and workforce upskilling in robotics, AI, and green manufacturing are essential.

Services will remain India’s growth engine. IT exports, fintech, AI, cybersecurity, healthcare, education, tourism, and hospitality can generate vast employment in the services sector. A gradual shift in GDP share from agriculture to the digital economy will reshape employment patterns, propelling India towards an advanced economy status by 2047.

Human capital investment is the linchpin. South Korea’s ‘Asian Miracle’ was built on technical education and manufacturing, enabling its leap to high-income status in 1995. India spends just 3.5% of its GDP on education, far below Brazil (6.5%) and Malaysia (4.5%).

As economist Jeffrey Sachs said, India has achieved outstanding success in conquering illiteracy, but it needs inventors. Strengthening technical education beyond elite IITs is critical. Without a skilled workforce, growth will stall.

If growth near 8% is sustained, risks managed, and inclusive job creation prioritised, India can plausibly graduate to UMI by 2030-2032. The longer march to the high-income status by 2047 will depend only on whether India invests in its people, its industries, and its institutions. Agriculture must raise productivity to release labour, manufacturing must scale globally, and services must innovate continuously.

The writer was a senior economist with the Asian Development Bank, Manila.

(Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.)