The Indian economy faces a serious dilemma: it continues to record high growth, but has failed to escape the lower-middle-income trap. For the past several years, the Indian government, business leadership, and policy establishment have presented the country’s recent rapid growth as one of the most compelling success stories in the contemporary global economy. There is, of course, a strong empirical basis for this claim. India has consistently ranked among the fastest-growing large economies in the world, and since the liberalisation reforms of 1991, it has consistently been among the top performers in the developing world.

Yet the headline claim that India is now the “fastest-growing major economy” requires closer scrutiny. India’s rise to this position has not necessarily resulted from a dramatic acceleration in its own growth trajectory. Rather, it has also been enabled by the gradual slowing of China’s economy as it matures, ages, and transitions away from the high-growth phase that defined its earlier development.

For much of the period from the 1990s to the late 2010s, China was the world’s fastest-growing major economy, often expanding at annual rates of 9 to 10 per cent. India, by contrast, was frequently the second-fastest-growing large economy, but its growth generally remained in the 6 to 8 per cent range. Since 2021, India has more or less inherited the title of the fastest-growing major economy, but not because its own growth rate has significantly accelerated. Rather, India has maintained broadly similar growth rates while China has decelerated to the 4 to 5 per cent range. In this sense, India’s new status is as much a consequence of China’s slowdown as it is of India’s own dynamism.

Three macroeconomic indicators have been central to India’s growth narrative: the size of its overall GDP, the rate at which that GDP has grown, and the expansion of India’s trade in both goods and services. On all three measures, India’s performance has been impressive. Its economy is much larger than it was three decades ago; its growth rate has remained comparatively high; and its integration into the global economy has deepened through rising imports and exports. In FY 2025–26, India’s total goods-and-services trade reached roughly $1.84 trillion—more than 40 per cent of the GDP—making it a major trading economy, but one that remains a net importer, with an overall trade deficit of about $119 billion and a much larger merchandise trade deficit of $333 billion. Yet these indicators, while important, are also different ways of describing the same broad fact: the Indian economy has expanded.

What these aggregate indicators do not adequately capture is how much income, productivity, and welfare have improved for the average Indian. That question is best addressed by indicators such as GDP per capita and the Human Development Index. These are indicators rarely invoked in India’s official growth discourse. When measured by aggregate GDP, India is now mentioned alongside the world’s largest economies—the US, China, Germany, and Japan. But when measured by GDP per capita, India remains far behind these economies.

India is now among the world’s five or six largest economies by total GDP, aided by its enormous population of more than 1.45 billion people. Yet its nominal GDP per capita, at roughly $2,813, places it only in the 140–150 range globally, and, by some current estimates, slightly behind neighbouring Bangladesh. Even when adjusted for purchasing power parity, measure Indian commentators often invoke when discussing per capita income, India’s GDP per capita rises only to a little above $12,000, placing it around 120th in the world.

The UNDP classifies countries into four human-development tiers: very high, high, medium, and low human development. India ranks 130th out of 193 countries, with an HDI value of 0.685, placing it in the medium human development category—a status that broadly mirrors its position as a lower-middle-income economy. In other words, India’s growth story has not yet translated into high quality-of-life outcomes: despite progress in income, health, and education, the country still lags in the broader human-development indicators that define a prosperous society.

This is the central anomaly of India’s development story: India has become a very large economy without yet becoming a broadly prosperous society. One reason is demographic scale. A large population can make an economy look globally significant even when average incomes remain modest. Despite the expansion of India’s middle class, the vast majority of Indians still live in a country that the World Bank classifies as a lower-middle-income economy.

India’s per capita income remains the most inconvenient fact in its growth story. While India’s growth boosters have spent the past several years celebrating the country as the world’s fastest-growing major economy, India has remained stuck in the World Bank’s lower-middle-income category since it first crossed into that group around 2007. This is striking because, during the same broad period—and especially since 2021—several countries have moved up the World Bank’s income ladder: from low-income to lower-middle-income, from lower-middle-income to upper-middle-income, or from upper-middle-income to high-income status.

By “lower-middle-income trap”, I mean a condition in which a country sustains respectable aggregate growth but fails to generate the productivity gains, employment expansion, wage growth, and human-capital improvements necessary to move into the upper-middle-income category. In India’s case, the trap is not the absence of growth, but the inability of growth to transform the material conditions of enough people quickly enough.

Countries as diverse as Indonesia, Iran, Algeria, Ukraine, Romania, Panama, Costa Rica, Cabo Verde, Samoa, and others have advanced into a higher category. Iran’s case is especially noteworthy, given that it achieved upward reclassification despite severe US and Western sanctions. India’s geopolitical rivals, Türkiye and China, are on the cusp of becoming high-income economies, while India is nowhere near becoming an upper-middle-income economy and remains embedded in the lower-middle-income category. This suggests that the central puzzle of India’s development is not whether the economy is growing, but why decades of growth have not been sufficient to lift the country into the upper-middle-income ranks.

Recent developments make this puzzle even more urgent. India’s growth remains impressive: the economy expanded by 7.7 per cent in FY 2025–26. But the past year has also exposed serious vulnerabilities in the growth model. Foreign portfolio investors registered record selling in Indian markets in FY 2026, while global capital has increasingly favoured technology- and semiconductor-linked Asian markets such as Taiwan and South Korea. The rupee has also come under pressure, depreciating significantly during the year. India’s dependence on imported energy compounds these risks.

As one of the world’s largest crude oil importers, with roughly 88 per cent of its crude needs met from abroad, India remains highly vulnerable to instability in the Gulf and the wider West Asia. A sustained oil shock could widen the current account deficit, intensify pressure on the rupee, raise inflation, and shave growth. Under these conditions, Prime Minister Narendra Modi’s oft-repeated Viksit Bharat ambition of making India a developed country by 2047 appears more difficult than ever. The more immediate question is whether India can even escape the lower-middle-income category and become an upper-middle-income economy in the foreseeable future.

The Gulf gateway to India’s economic rise

There is one major gateway out of this lower-middle-income trap in which the Indian economy currently finds itself: the Gulf and the broader West Asia. This region is critical to India’s chances of becoming what Prime Minister Narendra Modi often describes as Viksit Bharat—a developed India—or, at the very least, an upper-middle-income economy by 2047. This challenge is not merely rhetorical; as the World Bank’s income classifications make clear, India must cross a specific gross national income threshold before it can move beyond the lower-middle-income category.

At present, India’s gross national income, or GNI, per capita is roughly $2,600. To move into the World Bank’s upper-middle-income category, India must cross a threshold of about $4,500, though that figure is revised every year. GNI is especially important because it measures the income earned by a nation’s citizens, not merely what is produced within its borders. GDP measures the value of goods and services produced inside a country. GNI begins with GDP, but then adds income earned by citizens abroad and subtracts income earned by foreigners inside the country.

This distinction matters for India. If Indians earn substantial income overseas, that income can raise India’s GNI. But if foreigners earn more from investments and assets in India than Indians earn abroad, then India’s GNI will be lower than its GDP. That is currently the case. The difference is not very large, but it is still significant because it highlights yet another structural challenge India faces in its effort to climb into the upper-middle-income category. This is also why claims about India’s overall GDP ranking must be balanced against the country’s still-modest per capita income and lower-middle-income status, a point I have made elsewhere.

The Gulf and the broader West Asia are central to this challenge for several reasons. They are not merely an arena of diplomacy or energy imports; they are a dense network of trade, labour, remittances, investments, transport routes, and strategic access. With nearly 10 million Indians working in the Gulf, India depends heavily on the region for energy, and Iran remains India’s gateway to Central Asia.

First, the region is India’s largest trading partner. India’s trade with the Gulf and the broader West Asia is larger than its trade with any other major region. It is about $230 billion, or roughly 20 per cent of India’s total trade. Europe follows with about 16.7 per cent, China and Hong Kong account for about 14 per cent, and North America—the US, Canada, and Mexico—accounts for about 13 per cent. At present, therefore, the Gulf and the broader West Asia occupy a unique place in India’s external economic relations.

This position could change in the future if India successfully diversifies its energy sources. At the moment, however, India remains heavily dependent on the Gulf for energy, importing roughly 85 per cent of its crude oil needs and a substantial share of its gas from the region. This makes the Gulf not just a trading partner, but a strategic economic lifeline. Any disruption in the Gulf, therefore, has immediate consequences for India’s energy security, inflation, balance of payments, and growth outlook.

Second, the Gulf is a major source of jobs and remittances. Nearly 10 million Indians live and work in the region, and they send more than $50 billion to India every year. These remittances are classified as secondary income, and therefore, do not directly raise GNI in the same way that primary income does. But they are still extremely important. They bring in foreign currency, help stabilise India’s current account, and partly offset the large outflow of hard currency used to pay for energy imports.

Third, the Gulf is a labour market of enormous importance for India. It absorbs millions of Indian workers, both skilled and unskilled. This is especially important because India must create employment opportunities for a large and young workforce. The Gulf offers precisely the kind of external labour demand that can ease domestic employment pressures while also generating income flows back to India. This labour relationship is one reason India cannot treat Gulf diplomacy as secondary to its relations with the US, Europe, or East Asia.

Fourth, the Gulf is also an increasingly important source of investment in India. In recent years, both the United Arab Emirates and Saudi Arabia have not only promised but also begun investing billions of dollars in the Indian economy. These investments span infrastructure, energy, technology, logistics, ports, retail, and other strategic sectors. Officially recorded FDI equity inflows from Gulf countries into India totalled about $20 billion in 2020–2024, and if one looks at both foreign direct investment and broader private-capital investments from the Gulf and the West Asia, the total exceeds $50 billion over the past five years alone.

This demonstrates the enormous investment potential that the region holds for India. India’s status as the fastest-growing major economy can act as a powerful magnet for Gulf capital, especially as sovereign wealth funds and private investors in the region look for stable, large, and high-growth markets. Reuters has reported that India has captured a dominant share of West Asian private-capital deal value in Asia since 2020, and the IMF’s India outlook continues to show growth rates well above most major economies.

At the same time, Indians are also investing heavily in the Gulf and the broader West Asia. If one combines Indian foreign direct investment, real estate purchases, business expansion, and private investments, Indians have likely invested roughly $40–55 billion in the region over the past five years, with the UAE and especially Dubai accounting for the largest share. Dubai’s FDI data show India emerging as the leading source of estimated FDI capital into Dubai in 2024, underlining how the investment relationship between India and the Gulf is increasingly two-way rather than one-directional.

Gulf capital is flowing into India, but Indian capital, entrepreneurs, professionals, and businesses are also helping reshape the economies of the Gulf. Indians are especially visible in real estate, services, technology, retail, hospitality, logistics, and small and medium-sized enterprises. The mutual investment environment is already vibrant, and it has the potential to grow even stronger as Indian investors continue to view Dubai and other Gulf hubs as extensions of India’s commercial geography.

Fifth, the broader West Asia offers major future opportunities for Indian companies, contractors, engineers, and service providers. In the aftermath of war and instability in parts of the region, there will likely be significant demand for rebuilding, infrastructure, logistics, health care, construction, technology, and professional services. Indian firms and workers are well positioned to benefit from these opportunities, provided India maintains strong diplomatic and economic ties with the region.

Iran could become especially important in this context. If Iran secures meaningful relief from sanctions in the post-war scenario, trade between India and Iran could expand dramatically. India’s access to Central Asia through Iran’s Chabahar port could also open new avenues for commerce, connectivity, and strategic economic growth. For India, Iran is not merely another West Asian country; it is a potential gateway to Central Asia and beyond. This is why India’s Iran policy cannot be reduced to its relations with Washington, Tel Aviv, or the Gulf monarchies.

This is why the Gulf and the broader West Asia remain so central to India’s economic growth story. In recent years, India has placed many of its strategic and economic hopes in the American basket, focusing heavily on trade with the United States, technology partnerships, and expected investments in critical sectors such as semiconductors. But the deterioration of India-US relations during President Donald Trump’s second term creates an opportunity—and perhaps a necessity—for India to look elsewhere for growth, capital, markets, energy security, and strategic autonomy.

Three major arenas now matter for India’s future economic rise: ASEAN, China, and the Gulf. Of these, the Gulf is currently in pole position. It already offers India trade, energy, employment, remittances, investment, infrastructure opportunities, and access to wider regional markets. China remains both a competitor and a difficult partner. ASEAN is important, but its economic relationship with India has not yet reached its full potential. The Gulf, by contrast, is already deeply embedded in India’s economy and can become even more important if India makes the right strategic choices.

There remain, however, two major barriers to deeper India–West Asia relations and to the expansion of Indian influence in the region. The first is the heightened level of Islamophobia in India’s contemporary political and cultural discourse, including the routine vilification of Islam and the widely documented discrimination and violence faced by Indian Muslims. These developments have been noted by international human rights organisations as well as by the US in its annual reports on religious freedom. They damage India’s image in Muslim-majority societies and complicate New Delhi’s effort to present itself as a natural and trusted partner of the broader West Asia.

The second barrier is India’s increasingly visible alignment with Israel. This may not seriously disrupt India’s relations with the United Arab Emirates, which has itself normalised relations with Israel and developed a pragmatic strategic relationship with Tel Aviv. But it is likely to limit India’s ability to deepen engagement with other parts of the West Asia, especially countries and publics that remain deeply concerned about Palestine and Israeli military actions in Gaza, Lebanon, Syria, and Iran. Modi’s foreign policy has increasingly placed India in the Israel-US camp, with real consequences for India’s ability to maintain an older posture of strategic autonomy.

The political risks of anti-Islam rhetoric in India became evident a few years ago when a national spokesperson of the BJP made derogatory remarks about Prophet Muhammad. The comments triggered widespread outrage across the Gulf and the broader Muslim world, leading to strong condemnations from several West Asian governments. India moved quickly to contain the diplomatic fallout, but the episode demonstrated that domestic religious majoritarianism in India is not merely an internal matter.

It can quickly become a foreign policy liability, especially in a region where India has vital economic, energy, labor, and strategic interests. If India wants the Gulf and the broader West Asia to become a ramp out of the lower-middle-income trap, it will have to recognise that economic diplomacy cannot be separated from domestic politics and strategic alignment. A more balanced foreign policy abroad will require a more inclusive political culture at home, and a more credible engagement with the West Asia will require India not to appear as an uncritical partner of Israel or as a state indifferent to the concerns of Muslims, whether in India or in the wider region.

As India strives to escape the lower-middle-income trap, it is the Gulf and the broader West Asia that are most likely to provide the ramp toward upper-middle-income status. But this will require a rebalancing of India’s strategic priorities. India cannot afford to appear firmly aligned with the United States and Israel at the expense of Iran, the Arab Gulf states, and the wider Muslim West Asia. It will have to return to a more balanced and genuinely multi-aligned foreign policy—one that gives due importance to the US, Israel, Iran, Saudi Arabia, the United Arab Emirates, Qatar, and other key regional actors.

For these reasons, the Gulf and the broader West Asia are not peripheral to India’s economic future. They are central to it. The region provides energy, trade, employment, remittances, investments, reconstruction opportunities, and access to future markets. If India is serious about escaping the lower-middle-income trap and moving toward upper-middle-income status by 2047, then its relationship with the Gulf and the broader West Asia will be one of the most important factors shaping that journey.

This distinction matters for the broader argument. A country can grow faster than its peers and still fail to transform sufficiently to move its population decisively into higher income, higher productivity, and higher welfare conditions. India’s challenge, therefore, is not merely whether it can maintain respectable GDP growth rates, but whether that growth is strong, broad-based, employment-generating, and redistributive enough to escape the lower-middle-income trap. Escaping this trap will require more than celebrating high growth rates. It will require a development strategy that raises productivity, creates mass employment, expands human capital, increases female labor-force participation, strengthens manufacturing and exports, and converts India’s demographic scale into broad-based prosperity.

If China’s great anxiety is that it may grow old before it becomes rich, India’s dilemma is that it may continue growing larger without becoming richer.

Muqtedar Khan is Professor of International Relations at the University of Delaware and a Senior Non-Resident Fellow of the Middle East Policy Council.

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