India, China Converging To High Income Levels, Says Moody's

A higher cost of living and the erosion in disposable incomes on the back of multiple economic shocks are slowing the pace of middle-income economies' convergence to higher income levels, said Moody's

As trade and supply chains become less interdependent, stronger adoption of digitalisation and automation and a move to service-oriented growth models are likely to be more prominent drivers of productivity, according to Moody's.

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Of a select group of 27 middle-income sovereigns that Moody's rates globally, 13, including India and China, are clearly converging to high-income levels, said Moody's Investors Service on Thursday.

"The remainder have been in the same income category for decades and are either converging at a relatively slow pace or diverging from high-income levels," Moody's said.

According to Moody's, a higher cost of living and the erosion in disposable incomes on the back of multiple economic shocks are slowing the pace of middle-income economies' convergence to higher income levels.

"More importantly, emerging structural trends such as deglobalization, deindustrialisation and digitalisation mean that some factors that drove income convergence in the past may no longer be as effective, and the onus will be on policy to foster growth in productivity and income," Moody's said.

According to Anushka Shah, a Moody's Vice-President and Senior Credit Officer, as trade and supply chains become less interdependent, stronger adoption of digitalisation and automation and a move to service-oriented growth models are likely to be more prominent drivers of productivity.

"And climate change also poses disproportionately large costs for low- and middle-income economies," Shah said.

The credit rating agency said, lower-middle-income economies that are converging slowly will experience tougher policy hurdles as they struggle to meet development needs, fuelling social tensions. Upper-middle-income economies face the risk of income stagnation and strained growth models.

The experiences of most high-income economies today illustrate that high productivity growth accompanied by structural transformation has driven convergence, led by conducive industrial and trade policies, education, social reform, and governance enhancements, Moody's said.

A month back, Moody’s in an audience poll at the Emerging Market Summit Asia 2022 organised by Moody's Investors Service said that inflation and supply chain disruptions are the biggest risks over the next 12-18 months in emerging Asia. These two risks were followed by the potential impact of rising interest rates and slower economic growth, Moody's said.

"Given the supply chain disruptions, multinational corporations (MNCs) have indicated a rising intention to relocate more manufacturing away from China. Still, we agree with panelists that China will remain embedded in many supply chains due to its comparative advantages. Nevertheless, Southeast Asian economies will increasingly benefit from supply chain diversification as more MNCs adopt the 'China +1' strategy," said Jacintha Poh, a Moody's senior vice-president.