In this week's newsletter, we talk about India's middle-income trap, making the River Seine swimmable again, giveaway and more.

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Can India avoid the middle-income trap?

India is a middle-income country. But don’t just take our word for it, the World Bank agrees.

You see, back in 2006, India was in the low-income bracket. But thanks to some solid economic growth, averaging 6-7% annually, the country’s per capita income (average income per person) started climbing. This prompted the World Bank to upgrade India to the lower-middle-income club in 2007. And we’ve been cruising in that lane ever since.

But India’s government doesn’t want to settle for just cruising along. It’s now keen to break out of this status quo. And it has set a rather ambitious target for itself. It wants to turn India into a fully developed nation by 2047, the 100th year of independence. That’s right, it’s dreaming big.

And to make this a reality, NITI (National Institution for Transforming India) Aayog recently rolled out a paper titled ‘Vision for Viksit Bharat @ 2047’. It’s a roadmap for transforming India into a tech-savvy, economically robust and inclusive society.

The goal is to boost India’s GDP (Gross Domestic Product) or the value of all the goods and services the country produces from the current $3 trillion to a whopping nine times that. And raise the per capita income per annum from about $2,400 today to $19,000.

But the real kicker in the document isn’t just these ambitious targets. The big highlight is that India must dodge the dreaded ‘middle-income trap’ to hit these growth goals.

How do we do that, you ask?

To figure that out, we first need to understand what the ‘middle-income trap’ is all about. You could think of it as a situation where a country hits a certain level of GDP per capita, but then gets stuck there. Growth slows down, and the country struggles to make a leap to the high-income status.

Sidebar: As of 2023, the World Bank classifies a country as high-income if its annual per capita income tops around $14,000.

But hold on Finshots. Hasn’t India's GDP been on a roll? I mean, we’ve climbed up to the 5th largest economy globally from the 17th spot in the early 1990s. So, doesn’t that mean our GDP per capita should be skyrocketing too? How can you say that it’s been stagnant?

Let’s explain.

The culprit here is income inequality. For context, as per an Oxfam India report, between 2012 and 2021, over 40% of the wealth generated in India ended up in the pockets of just 1% of the population. Meanwhile, only 3% of that wealth trickled down to the bottom 50%.

And this uneven distribution has actually been a dampener for GDP per capita growth, even though India’s overall GDP has been steadily climbing.

To get a grip on this, let’s dive into Thomas Piketty’s ideas from his book Capital in the 21st Century.

Piketty talks about two key variables — the rate of return on capital (r) and the rate of economic growth (g). Basically, r is what you earn from investments. Think stuff like stocks, real estate and savings. And g is how fast the overall economy is growing, usually tracked by GDP.

And here’s the crux of his idea. When r > g, the rich get richer faster than the economy grows.

Why?

Because the returns on their investments are growing quicker than most people’s wages.

In developed countries like the US, where the economy is stable and resources are fully used, wealthy folks see their investments soar while wages lag behind, widening the wealth gap.

In contrast, developing economies often face r < g. Here, the economy might grow faster than the returns on investments due to issues like underemployment and skill mismatches. And you’d think that this would help reduce inequality since work income grows faster than investment returns.

But despite this potential advantage, income inequality still rises. And this situation culminates into a ‘middle-income trap’.

Sounds a bit like India’s growth story, no?

And this might mean that India could find it hard to escape the middle-income trap. But it’s not like India is the first country to be staring at this predicament.

Take Brazil, for instance. Back in the early 2000s, Brazil seemed poised for greatness. Booming commodity prices and successful social programs lifted millions out of poverty. It looked like Brazil might swiftly transition from middle-income to high-income status.

Fast forward to 2024, and Brazil, despite a solid per capita income of around $10,000, still can’t shake off the middle-income trap. Income inequality remains a major issue. To put things into perspective, the top 10% hold over half the country’s wealth, while the rest see minimal gains. Add to that structural problems like corruption and the susceptibility to global commodity price swings, and it’s clear why Brazil’s growth stalled.

Now, we don’t want to get stuck like Brazil in this middle-income trap. So, how do we break free from it?

Dr. Rathin Roy, a former economic advisor to the Finance Commission, has a solution or rather some practical recommendations to prevent India from a situation like that.

And here’s pretty much a gist of what he said.

Even if India seems to be growing right now, this growth might be more illusion than reality. That’s because India’s current growth isn’t based on what all Indians consume. It’s more about what a few million or the small wealthy segment of Indians want to buy. Just think about it. While some Indians splurge on air conditioners, cars and fancy gadgets, the essentials for most are nutritious food, decent housing, clothing, healthcare and education.

So Dr. Roy suggests that India needs to focus on making these essentials affordable without relying heavily on subsidies. Subsidies are essentially a way of shifting money from the rich to the poor. Instead, India could look to produce these goods more cost-effectively over time, possibly reducing subsidies gradually.

You could take textiles as an example. India is less competitive compared to countries like Bangladesh and Vietnam in this segment because of higher wages. And that’s a product of shirts being made in west Gujarat or Tirupur, but with labour from UP, Bihar and West Bengal. So it’s obviously going to be expensive because wages here are higher. But why not produce these textiles in states like Bihar, UP, West Bengal, Chhattisgarh and Orissa or places from where people often migrate to the south or west for jobs?

The idea is to give a boost to people who already know how to make these goods, so they can head back to their home states and start production there. These states have the potential to do this with just a little bit of upgrading. Essentially, it’s about tapping into local skills and resources to get things rolling right where they are.

And this shift could tackle two big issues. First, it could help with unemployment since this type of manufacturing requires lots of hands-on work. Second, it could address regional inequalities by spreading economic opportunities more evenly.

Right now, India’s growth is more about what a few wealthy people consume rather than what everyone needs. While exports are starting to play a bigger role, our economy is still largely driven by consumption. And if we don’t start producing the essentials that the majority of Indians need, we might just end up stuck in the middle-income trap.

So yeah, inclusive growth is the secret sauce for moving forward and making the leap to a high-income country while sidestepping that pesky middle-income trap. And with India making strides through things like PLI (Production Linked Incentives) schemes and a push for local manufacturing and jobs, here’s hoping we can pull it off! Godspeed.

Inside Paris' insane effort behind the Seine

Imagine taking a dip at the foot of the Eiffel Tower in Paris. If you’re there with a partner, it might just be the most romantic thing ever, right?

Well, that dreamy scenario has been off the table for tourists and Parisians for almost a century. That’s because the River Seine, one of Paris’ most iconic rivers, has been plagued by pollution. We’re talking about serious stuff here — like untreated sewage and, yes, even human waste floating in what should be the picturesque waters of this historic river.

But just a couple of days ago, triathletes at the Paris Olympics — those super fit folks who swim, cycle and run — dove into these very waters. And it wasn’t exactly a smooth sail.

The city has had at least 80 rainy days this year, which is about 2.5 weeks more than usual. And that just made things worse, because all that rain means the pipes can overflow. Instead of wastewater backing up into homes, it ends up flowing into the river. That’s why, leading up to the Games, the Seine was still murky and water quality tests weren’t exactly stellar.

Sure, the water was deemed swimmable about 7 out of 10 days, which might not sound terrible. But on those other days, the water was teeming with bacteria, viruses and some nasty stuff like E. coli — definitely not what you want in your swimming spot.

Now, it wasn’t as if Paris didn’t have other options. World Triathlon rules allow for the competition to ditch the swim and switch to a duathlon format if things get dicey.

But Paris probably got lucky when some last-minute tests showed that the water was safe enough for swimming. So they gave the triathlon the green light.

But hold on... If the Seine was so contaminated, why did they choose to have such an important event there in the first place?

Well, here’s the thing. The Seine isn’t just any river. It’s got serious cultural and historical significance for Paris. It even hosted swimming events during the 1900 Olympics! Back then, the water was much cleaner. And believe it or not, human waste was actually valuable because it was used as fertiliser on farms. So, people didn’t dump sewage into the river.

But as time went on, things changed. Mineral and chemical fertilisers became popular, the population grew, and modern sewage systems had to be developed. This led to untreated sewage from homes and businesses straining the capacity of the existing infrastructure. To prevent backflow, the city started discharging untreated wastewater into the Seine. By 1923, swimming in it was made illegal, partly due to the pollution and partly because of the dangers posed by boat traffic. And ever since, the Seine has remained a less inviting, no-swim zone in Paris.

Now, this isn’t a good look for a city that hosted the most significant climate agreement in history just under a decade ago — the Paris Agreement, aimed at limiting global warming to 1.5℃ above pre-industrial levels.

So when Paris threw its hat in the ring to host the Olympics just a year after the Paris Agreement, they had a game plan. They said, “Hey, let’s make the 2024 Games the greenest ever!”

Their goal?

To cut the carbon footprint compared to the London 2012 and Rio 2016 Games by half. Just to put things in perspective, those Games had an average carbon footprint of around 3.5 million tonnes.

And to make that green promise a reality, Paris really had to put in the effort.

They got creative with sustainable materials ― beds in the athletes’ village were made from recycled cardboard, coffee tables were crafted from recycled shuttlecocks, footstools from parachute canvas and chairs from recycled bottle tops.

They also aimed to double the amount of plant-based ingredients served to athletes, spectators and employees compared to the London 2012 and Rio 2016 Games. Plus, they promised that 80% of ingredients would come from local farms to cut down on transport emissions.

On top of that, the city made a big push to connect stadiums to the public electricity grid instead of relying on diesel generators. These connections will continue to be used even after the Games are over. And to get around, they planned a cycling network to link all the Olympic venues, making it easier and greener to travel between them.

But the biggest move was that they decided to use existing stadiums and venues instead of building new ones that might turn into white elephant venues. If that sounds new, white elephant venues are those big, expensive structures built for events like the Olympics that end up being underused, become costly to maintain or even tough to demolish after the event wraps up.

Sidebar: The term “white elephant” comes from Siam (now Thailand), where white elephants were rare and considered sacred. You couldn’t put them to work and they required special, costly care. That’s why the King would sometimes gift these pricey animals to those who displeased him, knowing that the upkeep could financially ruin them.

Canada’s Quebec for example, is still dealing with the Big O, a stadium built for the 1976 Games that critics now call the “Big Owe”. It took three decades to pay off the debt linked to it, and still costs taxpayers $40 million in repairs.

And Paris didn’t want these kinds of white elephant venues. So they only built two new ones — an aquatics centre and an arena for badminton and rhythmic gymnastics, out of the 35 venues they needed.

This decision also meant they had to really focus on sustainability, including cleaning up the Seine, since they weren’t building a new venue for the triathlon and marathon swimming events.

So they quickly put the plan into action, pouring in a whopping €1.4 billion ($1.5 billion) to clean up the Seine. This included building a massive basin to capture excess rainwater and prevent wastewater from spilling into the river — big enough to hold water from about 20 Olympic-sized swimming pools. They also upgraded the sewer infrastructure and wastewater treatment plants.

But was it worth it, you ask?

Well, it’s a bit of a mixed bag.

The water quality in the Seine did improve, but it still wasn’t consistently safe for swimming, especially when heavy rains would mess things up. However, the amount of untreated wastewater entering the river in 2022 was 90% lower than it was 20 years ago. So that’s a big win.

This cleanup effort also sets a great example for other cities in France and around the world looking to tackle pollution and climate change. Los Angeles, set to host the 2028 Olympics, even sent water and sanitation officials to Paris to study the Seine cleanup as part of their own preparations.

But for Paris, it may not be just about setting a global example. Cleaning up the Seine brings environmental and economic benefits too. The river now hosts over 30 fish species, compared to just 3 in 1970. And a swimmable Seine also offers Parisians a way to cool off during the hot summers. Because remember, it hit a scorching 43°C in 2019.

Economically, the 2024 Olympics could bring in €10 billion ($11 billion) and create 2,50,000 jobs. So, this cleanup isn’t just a good PR (public relations) strategy, it’s a smart investment too.

But yeah, it’s too soon to say if all the effort will pay off. The marathon swimming event is set for the last day of the Games. And if the water quality holds up, Paris could shine in the spotlight. If not, there’s always the backup plan at the Vaires-sur-Marne Nautical Stadium.

Regardless, Paris is committed to keeping up the efforts and aims to make swimming legal in the Seine for locals and visitors by 2025.

Will they succeed and set an example in the fight against climate change? Only time will tell.

✏️Jargon Explainer: MSF

And that's all for today folks! If you learned something new, make sure to subscribe to Finshots for more such insights :)

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