India's Manufacturing Gap: The Missing Bridge to Viksit Bharat

India has grown impressively. But growth alone does not guarantee transformation — and the weakness at the centre of India's economic structure is becoming impossible to ignore.

The Strong Foundation

India's macroeconomic story over the last decade is genuinely impressive:

• Real GDP growth of 6.5% in FY2024–25 — among the fastest of all major economies
• Strong domestic demand, subdued inflation, gradual fiscal consolidation
• A broadly stable financial sector through global turbulence

But sustaining this into the Viksit Bharat vision of 2047 requires more than macroeconomic stability. It requires activating all three engines of growth simultaneously:

Labour       →   absorbing workforce at scale
Capital      →   deploying it productively
Productivity →   accelerating structural efficiency

Currently, only some cylinders are firing.

The Structural Skew: Services Without Manufacturing

India's growth has been driven predominantly by services — IT, finance, business process — sectors that are high-productivity but low on labour absorption. Manufacturing, which should act as the critical bridge between low-productivity agriculture and high-productivity modern sectors, has not played that role.

In most successful development experiences — particularly East Asia — manufacturing created a cohort of medium and large firms that drove exports, absorbed labour, and generated broad-based productivity gains. India's manufacturing sector looks very different:

• A large number of small, low-productivity firms
• Very few mid-sized firms capable of scaling up
• A significant share of the workforce still trapped in agriculture, where productivity is far lower

The Economic Survey 2025–26 explicitly flags this: manufacturing is the weak link in India's development story, and without it, growth risks being neither sufficiently robust nor structurally stable.

Zombie Firms: The Hidden Drag

The deeper problem is what economists call weak business dynamism — the failure of creative destruction.

In a healthy economy, new, efficient firms replace older, unproductive ones. Resources — capital and labour — flow toward better uses. In India, this reallocation process remains slow. The result: the persistence of "zombie firms" — enterprises that are no longer economically viable but continue to operate.

A 2025 research paper, Zombie Firms in Emerging Markets: Survival and Funding Mechanisms, finds:

• Zombie firms constitute a small share of total firms but hold a disproportionately large share of total debt and assets
• Capital locked in zombie firms is capital unavailable to productive firms — a systemic drag
• Zombification is gradual and persistent, not cyclical — financial deterioration begins well before a firm is classified as a zombie
• Once zombified, firms become increasingly debt-dependent with little recovery in core performance

The financing structure matters critically:

Bank-financed firms   →   More likely to become zombies
                      →   Stay distressed longer
                      →   Relapse after partial recovery

Equity-financed firms →   Less prone to zombification
                      →   More likely to recover sustainably

This points to an institutional failure: financial and regulatory structures are sustaining inefficient firms rather than facilitating their exit — crowding out credit from productive enterprises and undermining overall productivity growth.

Why This Matters for Viksit Bharat

The ambition of becoming a developed economy by 2047 rests on a productivity leap that the current structure cannot deliver:

• Labour remains in low-productivity agriculture because manufacturing hasn't expanded enough to absorb it
• Capital is locked in zombie firms instead of flowing to scalable, productive enterprises
• Efficiency gaps persist despite significant infrastructure investment

Growth has laid the foundation. But without a manufacturing sector that is both larger and more productive, India risks a growth pattern that generates GDP numbers without generating broad-based income improvements or structural stability.

Way Forward

• Simplify regulations: Reduce compliance burden that disproportionately traps small firms in low-productivity equilibrium
• Strengthen insolvency processes: The IBC framework needs faster resolution to enable genuine exit of zombie firms and free up capital
• Improve credit allocation: Shift from bank-dominated, relationship-based lending toward equity financing — which demonstrably produces more resilient firms
• Ease labour constraints: Rigid labour laws discourage firms from scaling; reform must enable firms to grow without fear of hiring
• Deeper GVC integration: Manufacturing productivity requires exposure to global value chains — export competitiveness forces efficiency improvements that domestic markets do not
• Productive R&D investment: Firm-level innovation capacity must be built alongside infrastructure investment, not treated as a later-stage priority

Conclusion

India's growth record is real and earned. But growth built on services and domestic demand, without a productive manufacturing base, is a one-legged stool. The Economic Survey 2025–26 is right to identify manufacturing as the weak link. The zombie firm problem crystallises the deeper issue: India's institutional structures are better at keeping inefficient firms alive than at helping efficient ones grow. Viksit Bharat is not just a GDP target — it is a structural transformation. And that transformation will be decided not by how fast India grows, but by whether it can build the manufacturing depth, business dynamism, and capital efficiency to sustain that growth across decades.