From Growth to Productivity: India’s Path to Viksit Bharat by 2047

After Reading This Article You Can Solve This UPSC Mains Model Questions:  

Why has India’s manufacturing sector not emerged as a strong engine of productivity growth and labour absorption despite rapid economic expansion? Discuss with suitable measures. 15 Marks (GS-3, Economy)

Introduction

• India has recorded a real Gross Domestic Product (GDP) growth of 6.5% in FY 2024–25, making it one of the fastest-growing major economies in the world, supported by strong domestic demand, macroeconomic stability, controlled inflation, and gradual fiscal consolidation,
• The Economic Survey 2025–26 highlights that India’s future growth must increasingly depend on a productivity-led transformation driven by all three engines of growth — Labour, Capital, and Total Factor Productivity (TFP) — as excessive dependence on the services sector alone cannot generate large-scale employment or sustain broad-based structural transformation for India’s vast working population.
• Achieving the vision of Viksit Bharat by 2047 will therefore require a decisive transition from merely achieving high growth to ensuring efficient and productive growth, with manufacturing emerging as the central pillar.

Manufacturing: Role of Manufacturing and its Missing Link in India’s Development Journey

A. Role of Manufacturing in National Development

• Bridge Between Sectors: In every successful development story — particularly in East Asian economies such as South Korea, Taiwan, and China — manufacturing served as the critical bridge between low-productivity agriculture and high-productivity modern sectors, enabling a smooth and broad-based structural transformation.
• Employment at Scale: Manufacturing is uniquely capable of absorbing large numbers of workers, including those without high educational qualifications, and providing them with stable, formal employment — something the services sector alone cannot achieve at the scale India needs.
• Economic Survey’s Position: The Economic Survey 2025–26 has explicitly stated that manufacturing is central to sustaining India’s growth and generating employment at scale, reinforcing the urgency of making manufacturing both bigger and more productive.

B. India’s Manufacturing Gap: Why the Sector Has Fallen Short

• Services-Led, Not Manufacturing-Led: India’s economic growth has been predominantly services-driven. While services have performed well, manufacturing has not expanded sufficiently to absorb the large workforce or generate broad-based productivity gains across the economy.
• Labour Stuck in Agriculture: As a result of weak manufacturing growth, a disproportionately large share of India’s labour force remains in low-productivity agriculture, unable to move into more productive and better-paying sectors — the very transition that development requires.
• Missing Middle in Firm Structure: India’s manufacturing is dominated by a large number of very small, low-productivity firms and has very few mid-sized firms capable of scaling up. In contrast, East Asian economies built strong cohorts of medium and large firms that drove exports and industrial growth — India’s ‘missing middle’ is a key structural weakness.
• Efficiency Gap Despite Infrastructure: Despite significant recent investments in infrastructure, efficiency gaps in India’s manufacturing sector persist, meaning that returns on capital invested remain below potential, a problem rooted not just in hardware but in how firms are organised and managed.

Key Challenges Preventing Productivity from Rising

A. Weak Business Dynamism and the Problem of Creative Destruction

• Creative Destruction: Economists describe creative destruction as the process by which new, more efficient firms replace older, less productive ones — freeing up capital and labour for better uses. This is the primary engine of productivity growth in modern economies.
• India’s Slow Churning: In India, this process remains sluggish. Inefficient firms continue to survive for long periods, while productive newer firms struggle to access the credit, land, and labour they need to grow — a pattern that collectively suppresses overall productivity.

B. Zombie Firms: A Persistent Drain on the Economy

• Zombie Firms: Zombie firms are companies that are no longer economically viable — they cannot earn enough to even cover their interest payments — yet continue to operate, kept alive by bank loans or regulatory forbearance rather than genuine business performance.
• Scale of the Problem: A 2025 research paper titled ‘Zombie Firms in Emerging Markets: Survival and Funding Mechanisms’ reveals that while zombie firms form a small share of total firms, they account for a disproportionately large share of total debt and assets — meaning a significant volume of the economy’s resources is locked in unproductive use.
• Crowding Out Productive Firms: By occupying credit, labour, and capital, zombie firms crowd out productive firms that could grow and generate employment — directly undermining India’s productivity and job creation goals.
• Gradual and Persistent Nature: The research shows that zombification is not a sudden crisis but a slow, persistent deterioration — financial decline begins well before a firm is formally identified as a zombie, and once there, recovery is rare and often temporary.
• Bank Financing Worsens Outcomes: Crucially, the source of financing matters: firms funded primarily through bank loans are far more likely to become zombies and remain so for longer, whereas equity-financed firms recover faster and are less prone to zombification — pointing to a structural weakness in India’s bank-dominated financial system.

C. Institutional Failures That Keep Inefficient Firms Alive

• Reluctance to Recognise Losses: India’s financial and regulatory structures have historically supported continued operation of stressed firms rather than facilitating their orderly exit — due to bank reluctance to recognise bad loans and regulatory delays in insolvency resolution.
• Insolvency Bottlenecks: The Insolvency and Bankruptcy Code, 2016, while a landmark reform, still faces capacity constraints and delays in the National Company Law Tribunal, slowing down the reallocation of assets from failed firms to productive ones.
• Rigid Factor Markets: Inefficiencies in land, labour, and capital markets further restrict productive firms from scaling up and unproductive ones from exiting cleanly — trapping resources across the economy.

Government Initiatives to Strengthen Manufacturing and Productivity

• Production Linked Incentive (PLI) Scheme and PLI 2.0: Launched across 14 key sectors including electronics, pharmaceuticals, and automobiles to incentivise large-scale manufacturing and integrate India into Global Value Chains (GVCs) and transform India into a major global manufacturing hub through higher value addition and technological advancement.
• PM GatiShakti — National Master Plan: A multi-modal infrastructure connectivity plan to reduce logistics costs, ease movement of goods, and directly improve manufacturing competitiveness.
• National Logistics Policy, 2022: Aims to reduce India’s high logistics costs from 14–16% of Gross Domestic Product to 8% by 2030, bringing them closer to global benchmarks and easing the cost burden on manufacturers.
• Insolvency and Bankruptcy Code, 2016: Provides a time-bound resolution mechanism for stressed firms, enabling exit of unviable businesses and reallocation of their assets to productive use, though further strengthening is needed.
• Labour Code Reforms: Consolidation of 29 central labour laws into 4 Labour Codes to simplify compliance, improve flexibility, and encourage formal employment in manufacturing.
• Make in India and MSME (Micro, Small and Medium Enterprises) Reforms: Focused on ease of doing business, collateral-free credit, and formalisation to help small firms grow and access formal financial markets.

Way Forward for Achieving the Goal of Viksit Bharat through Productivity-Led Growth

• Deepen Global Value Chain Integration: India must reduce tariff and non-tariff barriers, improve trade facilitation, and position itself as a reliable manufacturing partner in high-growth sectors like electronics, chemicals, and defence to capture a larger share of global production.
• Boost Research and Development in Manufacturing: Increasing investment in research and development, technology adoption, and innovation through industry-academia linkages and public-private partnerships will drive sustained productivity improvements across manufacturing.
• Strengthen the Insolvency Framework: Expanding National Company Law Tribunal capacity, reducing resolution timelines, and improving creditor rights will enable faster exit of zombie firms and quicker reallocation of resources to more productive uses.
• Shift Financing Towards Equity: Developing deeper capital markets, venture capital ecosystems, and angel investor networks will reduce dependence on bank financing, lower the risk of zombie firm formation, and improve the overall resilience of the business sector.
• Reform Credit Allocation: Introducing stricter early-warning systems and proactive non-performing asset recognition in banks will reduce the flow of credit to unviable firms and redirect it towards productive enterprises.
• Simplify Regulations and Implement Labour Codes: Reducing regulatory compliance burdens and effectively implementing the four Labour Codes will allow firms to scale, restructure, and respond to market conditions without unnecessary rigidity.

Conclusion

Achieving the vision of Viksit Bharat by 2047 will require India to move beyond high GDP growth toward sustained productivity-led development through stronger manufacturing, efficient resource allocation, and deep structural reforms that enable productive firms to grow while allowing inefficient firms to exit.