[16th May 2026] The Hindu OpED: Productivity, and not just growth, for Viksit Bharat

Mentor’s Comment

The debate on India’s growth model has gained significance as the Economic Survey 2025-26 places manufacturing at the centre of India’s next development phase. This signals a shift from growth-led optimism to productivity-led structural reform. This marks a contrast with the post-pandemic period, where India relied heavily on strong domestic demand, macroeconomic stability, and services-led growth. The issue is significant because despite being among the fastest-growing major economies, India continues to face manufacturing inefficiencies, labour concentration in low-productivity agriculture, and rising firm-level distress.

Why is economic growth alone insufficient for achieving Viksit Bharat?

1. Macroeconomic Stability: India maintained relatively high growth with subdued inflation, gradual fiscal consolidation, and a stable financial sector, ensuring post-pandemic resilience.
2. Growth Limitation: Sustained long-term growth requires higher productivity in labour, capital, and production systems, not merely aggregate GDP expansion.
3. Structural Reform Requirement: Transition to Viksit Bharat demands activation of all growth engines through institutional reforms, efficient resource allocation, and productivity enhancement.
4. Productivity Imperative: Growth without productivity gains risks declining competitiveness, weak income expansion, and stagnation in employment generation.

Why has manufacturing failed to become the bridge for structural transformation in India?

1. Manufacturing Deficit: India’s structural transformation remains skewed as services expanded rapidly without proportional manufacturing deepening, limiting labour absorption.
2. Employment Challenge: Manufacturing failed to absorb surplus labour from agriculture at scale, unlike successful East Asian industrialisation experiences.
3. Low Productivity Concern: Manufacturing productivity remains below potential despite infrastructure expansion and policy support.
4. Economic Survey Observation: The Economic Survey 2025-26 identifies manufacturing as central to sustaining growth and employment generation, particularly for large-scale workforce absorption.
5. Structural Instability: Overdependence on services weakens long-term resilience because services alone cannot generate broad-based productivity gains across the economy.

How does India’s firm structure constrain productivity growth?

1. Fragmented Enterprise Base: India’s manufacturing ecosystem consists of large numbers of small, low-productivity firms and relatively few scalable medium-sized enterprises.
2. Missing Middle Problem: Weak emergence of medium and large firms contrasts sharply with East Asian economies, where industrial growth was driven by competitive export-oriented firms.
3. Scaling Constraint: Regulatory complexity, labour rigidities, and financing barriers prevent efficient firms from expanding.
4. Efficiency Loss: Weak firm dynamism restricts efficient factor allocation and slows productivity improvement.
5. Labour Misallocation: A substantial workforce remains in low-productivity agriculture, reducing economy-wide productivity growth.

How do zombie firms undermine economic efficiency and productivity?

1. Zombie Firms: Economically unviable firms continue operations despite weak fundamentals, preventing efficient reallocation of labour and capital.
2. Creative Destruction Failure: Productivity growth weakens when newer productive firms fail to replace inefficient firms.
3. Capital Lock-in: Zombie firms absorb disproportionate shares of debt and assets, reducing credit availability for productive enterprises.
4. Research Evidence: The paper “Zombie Firms in Emerging Markets: Survival and Funding Mechanisms” (2025) highlights that zombie firms account for a relatively small share of firms but disproportionately hold larger shares of debt and assets.
5. Financial Distress Persistence: Deterioration begins before firms become classified as zombies, and bank-financed firms remain distressed longer and relapse more often.
6. Equity Financing Advantage: Equity-financed firms display relatively greater resilience and sustainable recovery.

Why is inefficient financial intermediation emerging as a structural challenge?

1. Credit Misallocation: Financial systems often sustain inefficient firms instead of facilitating market exit.
2. Institutional Weakness: Weak insolvency resolution and delayed restructuring reduce productivity-enhancing capital movement.
3. Crowding-Out Effect: Lending to distressed firms restricts credit access for innovative and productive firms.
4. Regulatory Constraint: Slow business exit mechanisms weaken industrial competitiveness and productivity growth.

What manufacturing-led strategy is required for Viksit Bharat?

1. Scale Expansion: India requires deeper manufacturing expansion capable of generating employment and productivity simultaneously.
2. Global Value Chains (GVCs): Stronger integration into global production networks ensures export competitiveness and industrial upgrading.
3. Trade Barrier Rationalisation: Lower frictions strengthen competitiveness and facilitate participation in global manufacturing systems.
4. Infrastructure Efficiency: Continued infrastructure investment must focus on efficiency gains, not only physical expansion.
5. Business Dynamism: Productive firms require easier growth conditions, while inefficient firms require smoother exit mechanisms.
6. Regulatory Simplification: Reduced compliance burdens facilitate industrial scaling and formalisation.
7. Credit Access: Better financial allocation strengthens investment in productive sectors.
8. Research and Development: Innovation capacity improves productivity and technological competitiveness.

How can productivity become the foundation of India’s long-term development model?

1. Factor Productivity: Higher efficiency in labour and capital utilisation ensures sustainable growth.
2. Structural Transformation: Labour movement from low-productivity agriculture to higher-productivity manufacturing and services strengthens income generation.
3. Competitive Industrialisation: Manufacturing productivity enhances exports, wages, and employment resilience.
4. Institutional Reform: Efficient insolvency systems, financial reforms, and business facilitation strengthen long-term competitiveness.
5. Viksit Bharat Goal: Growth provides momentum, but productivity determines whether India can sustain high-income transition by 2047.

Conclusion

India’s post-pandemic growth performance provides a strong foundation for Viksit Bharat. However, the next phase of development depends on whether growth translates into higher productivity, competitive manufacturing, efficient resource allocation, and stronger business dynamism. Sustained prosperity will require India to move beyond GDP expansion toward a productivity-led development model rooted in structural reforms and industrial competitiveness.