Context:

• India’s recent economic performance has been strong, especially in the post-COVID-19 period, combining relatively high growth with macroeconomic stability in a manner achieved by few large economies.
• Real GDP growth reached 6.5% in FY 2024-25, making India one of the fastest-growing major economies globally.
• This performance has been supported by strong domestic demand, subdued inflation, gradual fiscal consolidation, and a broadly stable financial sector.
• However, while India has recorded meaningful productivity growth over recent decades, achieving the goal of Viksit Bharat by 2047 will require a faster pace of growth.
• This will depend not only on maintaining macroeconomic stability, but also on activating all engines of growth—labour, capital, and productivity—through deeper structural reforms.
• This article highlights why India’s journey to Viksit Bharat by 2047 requires a shift from growth-led expansion to productivity-led transformation.

Manufacturing: The Missing Link in India’s Structural Transformation

• The Economic Survey 2025-26 highlights that manufacturing must anchor India’s next phase of growth.
• However, the challenge is not merely expanding manufacturing, but making it more productive.
• Skewed Structural Transformation
  • India’s growth has been largely driven by the services sector, while manufacturing has not expanded enough to absorb labour or deliver broad-based productivity gains.
  • This creates an imbalanced pattern of structural transformation.
  • In successful development models, manufacturing acts as a bridge between low-productivity agriculture and high-productivity modern sectors.
  • It plays a critical role in sustaining growth and generating large-scale employment.
• Productivity and Firm Structure Challenges
  • Manufacturing productivity in India remains below its potential and lags behind international peers.
  • A major reason is the sector’s structure, marked by numerous small, low-productivity firms and too few mid-sized firms capable of scaling up.
  • Unlike India, successful East Asian economies developed strong medium and large manufacturing firms that boosted exports, productivity, and industrial growth.
  • The current structure leads to inefficient allocation of resources, with a large share of labour remaining stuck in low-productivity agriculture instead of moving to more productive sectors.
  • Despite significant investments, especially in infrastructure, efficiency gaps continue to persist in the manufacturing sector.

Zombie Firms and India’s Productivity Challenge

• India’s productivity growth is constrained by weak business dynamism. The process of “creative destruction,” where efficient firms replace inefficient ones, remains slow, limiting productivity gains.
• Small, low-productivity “zombie” firms continue operating despite being economically unviable. These firms lock up capital and labour that could otherwise be used more productively.
• Although zombie firms form a small share of total firms, they account for a disproportionately large share of total debt and assets, creating significant inefficiencies in resource allocation.
• A Persistent Structural Problem
  • Zombification is a gradual and persistent process rather than a temporary cyclical issue.
  • Firms begin deteriorating financially well before being classified as zombies and often remain trapped in distress.
  • The source of financing affects firm survival. Bank-financed firms are more likely to become zombie firms, stay distressed longer, and relapse after partial recovery, while equity-financed firms show better recovery prospects.
  • Financial and regulatory systems often keep inefficient firms alive instead of enabling their exit.
  • This crowds out credit for productive firms and weakens overall productivity growth.

Strategy for Viksit Bharat

• Manufacturing-Led Growth as the Core Strategy - India’s journey to Viksit Bharat requires a manufacturing-led growth strategy that focuses not only on expanding scale but also on improving efficiency and productivity.
• Strengthening Manufacturing Competitiveness - Expanding manufacturing will require deeper integration into global value chains, addressing trade barriers, and sustaining infrastructure investment to improve competitiveness.
• Boosting Productivity and Business Dynamism - Higher productivity will depend on stronger business dynamism, greater research and development, and an environment that enables efficient firms to grow.
• Enabling Exit of Inefficient Firms - Productivity gains also require allowing unproductive firms to exit so that capital and labour can be reallocated to more efficient uses.
• Reform Priorities - Key reforms should focus on simplifying regulations, easing labour constraints, strengthening insolvency mechanisms, improving credit allocation, and expanding access to finance.

Conclusion

• Achieving Viksit Bharat will depend not just on sustaining growth, but on raising productivity through stronger manufacturing, efficient resource allocation, structural reforms, and greater business dynamism.