The Indian economy is suffering from schizophrenia, accentuated by external economic shock. Growth is high, consumer inflation low. But domestic investors are playing coy, and foreign investors are scrambling to exit. The stock market is in decline. Fresh graduates from our best institutions are taking entry-level jobs that aren't paying enough for them to be eligible to pay income-tax.The world's 4th-largest economy has, in a few months, shrunk to being the 6th-largest. Global investors are fixated on two growth areas: AI, and commodities. India is not a player in either.This situation was predictable since 2019. Internally, India has long faced two structural problems: stagnant domestic demand, and low productivity. In benign times, one can paper over these and boast in the future tense, senses dulled by the opiate of civilisational glory.But come an external crisis, things begin to fall apart. Foreign investors and political leaders switch from insincere brown-nosing to thinly-veiled contempt. Acolytes become critics. Panic sets in.But panic is unwarranted. India's predictable slide into economic mediocrity follows a well-trodden path into a middle-income trap. Countries from Brazil to Egypt to Thailand to the Philippines have trodden this path, often ignored as the glamorous successes of South Korea, China and Taiwan are highlighted. Who likes sad news stories?The road to the middle-income trap is marked by episodes of high growth and low inflation, even in the face of structural weakness. Foreign investors talk up an economy as the next big thing - only to dump it when a crisis exposes underlying weaknesses, which are always the same: a structural demand problem and persistently low productivity.Weak authoritarian regimes often come to power when citizens are frustrated with unequalising progress. But these regimes provide only polarisation, slogans and hubris, to paper over these weaknesses. But they are powerless when an external crisis hits.The economy is growing at 7.5%+, and inflation is in the low single digits. This is a fabulous macroeconomic result. But what is it delivering? When a developing country becomes prosperous, growth results in positive structural change: value of output increases, as does share of the formal sector and manufacturing. This has not happened in India.Share of manufacturing in GDP has fallen to the lowest level this century. As the IT sector has stalled with the rise of AI, informal services - personal and intermediate services - have been the backbone of growth. As a result, employment has stagnated.India is facing an acute jobs and wages crisis. Young people have disproportionately felt the impact. Just 7% of the population is now prosperous enough to pay I-T, and no young person entering the job market, even with professional or postgrad qualifications, is paid enough to be in even the lowest tax bracket. A top blue-collar job in Samsung or Apple pays less than ₹25,000 a month, 1/4th of the I-T threshold.So, demand in the economy is weak. Once companies have soaked demand of the rich, even small changes in price result in excess supply, as IndiGo and Air India have recently learnt, as have automobile and FMCG companies. Low investment means low demand for capital goods. Loan- (as opposed to wage-) fuelled consumption means extreme price sensitivity with respect to discretionary purchases. Add to that low demand for food, and you end up with low inflation. But this signals economic weakness, not strength.High GDP growth that does not translate into more and better jobs, and results in weak inflation due to poor demand, signals a middle-income trap. From Brazil to Egypt to Thailand, low productivity marked by insufficient structural change, combined with weak demand due to a widespread wage squeeze and persistent informality, led to a situation where, despite income growth, these countries wallow in mediocrity.Poor education and health, shanty towns, high crime, weak institutions - all hallmarks of a low-income country - persist even as a country attains middle-income status. Life for everyone becomes volatile with every external shock. Institutions deteriorate.The external shock just puts these things in the spotlight as governments run out of options. A rise in oil prices means a widening CAD. Low productivity means that a reduction in that deficit is not feasible through an increase in exports, or import substitution of Chinese imports - not even Ganesh idols. And domestic private investment is tepid.So, we want foreign investment to pay for CAD. Hence, the other cure - a sharp depreciation - is not an option. The more we devalue, whatever the growth rate, the less attractive India is as an investment proposition for foreigners. So, GoI has to seduce foreigners to invest in India by offering them forex hedges and other attractive terms. But none of this will improve economic prosperity, as none of this impacts low productivity, stagnant employment, wages and, resultantly, weak demand.Welcome to the depressing, mediocre country playbook. Many countries in our lifetime have played this book. We may have been players in this mediocre game in 2019. Sunk in hubris, no one listened. Now, a crisis has arrived and brings with it the predicted bleakness.It is said that the owl of Minerva flies at dusk. One hopes it does, indeed, fly. For it to continue to nest in hubris now would mean permanent, irreversible economic damage to lives and prospects of generations to follow.(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)