The Middle-Income Trap: Evidence from Indian States and Cross-Country Comparisons

Abstract

This paper investigates the middle-income trap phenomenon using panel data from Indian states (2000-2024) and cross-country evidence from 95 countries over five decades (1970-2020). We employ threshold regression techniques and growth decomposition methods to identify distinct growth dynamics at different income levels. We find evidence that countries and Indian states face systematic growth slowdowns when reaching $8,000-$15,000 GDP per capita (2015 PPP). The trap is characterized by declining returns to capital accumulation, inability to compete in low-cost manufacturing, and insufficient innovation capacity. Among Indian states, only five of twelve middle-income states successfully transitioned to high-income status, while nationally India remains trapped at upper-middle-income levels. Key determinants of escape include education quality, innovation capacity, export sophistication, and institutional quality.