Context
- India’s real GDP growth reached 6.5% in FY2024-25, making it one of the fastest-growing economies. Growth has been underpinned by strong domestic demand and gradual fiscal consolidation.
- India aims to become Viksit Bharat by 2047, requiring sustained productivity acceleration. Further, the post-COVID performance combined high growth with macroeconomic stability remarkably well.
New Economic Reality
- Economic Survey 2025-26 recognises manufacturing must anchor India’s next growth phase.
- Services have driven growth but manufacturing has not expanded sufficiently to absorb labour.
- India’s structural transformation has been skewed towards services, neglecting manufacturing depth.
- Manufacturing acts as a bridge between low-productivity agriculture and high-productivity modern sectors.
- Without manufacturing expansion, India risks growth that is neither robust nor structurally stable.
Role of Manufacturing
- Manufacturing productivity has lagged behind both its potential and international peers significantly.
- India’s sector is dominated by small, low-productivity firms with few mid-sized scalable firms.
- East Asian economies succeeded through a strong cohort of medium and large firms.
- Current structure leads to inefficient factor allocation with labour trapped in low-productivity agriculture.
- Despite significant infrastructure investment, critical efficiency gaps in manufacturing remain.
Impact on India
- Challenges
- Zombie firms — non-viable but operating entities — tie up capital and labour unproductively.
- Zombie firms hold a disproportionately large share of total debt and assets in the economy.
- Bank-financed firms are more likely to become zombies and remain distressed for longer.
- Financial and regulatory structures sustain inefficient firms rather than facilitating their exit.
- Zombification crowds out credit from productive firms, undermining overall productivity growth.
- Structural Concerns
- Creative destruction — replacement of old firms by efficient ones — remains slow in India.
- Zombification is a gradual, persistent process, not a cyclical or temporary phenomenon.
- Firms show financial deterioration well before being formally classified as zombie firms.
- Equity-financed firms are less prone to zombification and recover more sustainably than bank-financed ones.
- Weak business dynamism remains a deep structural constraint on India’s productivity growth.
Way Forward
- India must deepen integration into global value chains to expand manufacturing competitively.
- Reforms must focus on simplifying regulations and easing labour market constraints effectively.
- Strengthening insolvency processes is essential to enable exit of unviable firms.
- Improving credit allocation and expanding access to equity financing must be prioritised.
- Investment in productive research and development is critical for sustained productivity gains.
Conclusion
- Growth has laid the foundation but enhanced productivity will determine India’s developmental leap. Enabling firms to grow and inefficient firms to exit is equally important for progress. Viksit Bharat depends on completing the transition from growth-led to productivity-led development.
