Nov 03, 2026 | Updated 05:25 PM GMT+5:30
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Economic growth is about how societies organise economic activity, accumulate knowledge and discover better ways of producing goods and services. It is driven by two fundamental forces: institutional change and technological change.
For a large part of history, growth was driven by institutional change. Before the Industrial Revolution, economic progress in Western societies was driven substantially by institutional developments. The establishment of commercial relationships, reliable credit, enforceable contracts and greater trust enabled people to exchange, invest and allocate resources more efficiently.
The Industrial Revolution changed this: growth began to come from the systematic accumulation and application of knowledge, which enabled societies to produce more with the same resources.
Institutions influence whether productive activity can take place efficiently and at scale; technology determines how much more productive that activity can become.
The two are complementary rather than competing explanations of growth.
India’s recent reform trajectory can be seen through this framework. Reforms such as the Goods and Services Tax (GST), the Jan Vishwas legislation and labour-code reforms seek to reduce frictions, improve compliance and facilitate economic activity.
But better rules are a means to higher productive capacity, not an end in themselves. And hence the wise question to ask is: are we achieving that end?
The best metric to answer that is examining output per worker. This measures the economic output generated, on average, by each employed person and reflects the combined influence of technology, capital, skills, management and the efficiency with which resources are used.
Let’s examine India’s performance vis-a-vis China. As Figure 1 illustrates, drawing on ILO data on the annual growth in real GDP per employed person, China’s output per worker increased from approximately $15,770 in 2008 to $48,126 in 2025. India’s output per worker rose from $12,221 to $24,842 over the same period. China’s output per worker more than tripled, while India’s roughly doubled.
Figure 1: Annual Growth in Real GDP per Employed Person
GDP growth and growth in GDP per employed person have largely moved in tandem in China. In India, however, as Figure 2 illustrates, the divergence between the two has widened in recent years. Despite institutional reforms, this raises questions about whether technological change and productivity-enhancing innovation have kept pace with economic expansion.
Figure 2: India’s GDP Growth Compared with Growth in Real GDP per Employed Person
Productivity tells us how much an economy produces per worker. Economic complexity adds another perspective: what an economy is capable of producing.
The Economic Complexity Index (ECI), developed by Harvard University’s Growth Lab, assesses productive capabilities through the diversity of a country’s exports and the sophistication of the products it exports, including how widely those products are produced elsewhere. Countries that manufacture a diverse range of sophisticated goods generally possess specialised knowledge, industrial capabilities and production networks that are difficult to replicate quickly.
Figure 3 shows the changes in ECI rankings between 2012 and 2024. China’s position improved from 17th to 10th, while India’s rose from 51st to 41st. Vietnam advanced from 68th to 45th over the same period.
India has made progress, but its ranking suggests considerable scope to deepen and diversify its productive capabilities.
Figure 3: Economic Complexity Index Rankings of China, India and Vietnam (2012–2024)
Why India Lags in Productivity
India’s productivity challenge is not merely a question of developing new technologies. It is one of ensuring that existing knowledge reaches the firms that need it.
This is particularly important for micro, small and medium enterprises (MSMEs), which account for a substantial part of India’s industrial base but often lack the managerial capacity, technical expertise and resources available to larger firms.
Small companies tend to be less productive than large ones. But the relative difference in productivity between large and small firms is much larger in India than in the US. An IMF study finds that India’s smallest firms are less than one-fifth as productive as its large firms. In the US, the smallest firms are nearly half as productive as large ones.
Over and above that, nearly 75 per cent of manufacturing establishments in India employ fewer than five paid workers, compared to 38 per cent of manufacturing establishments in the US.
Less than 2 per cent of India’s establishments have more than 100 paid workers, whereas 9 per cent of American establishments do. Hence, it’s a double whammy that India faces.
Figure 4: India vs the US: Distribution of Establishments and Relative Productivity by Firm Size
The problem is not always the absence of sophisticated technology. It can be the failure to adopt relatively straightforward improvements in production planning, inventory management, quality control and workflow organisation.
Large manufacturers can employ specialised managers and consultants to identify such inefficiencies and implement established practices. Smaller firms, operating with limited managerial bandwidth and technical resources, may struggle to identify these opportunities or assess the returns from adopting them.
A study of management practices in Indian textile plants found that professional management interventions increased average productivity by 11 per cent through improvements in quality, efficiency and inventory management.
Another study shows that India’s economy suffers from “a lack of selection” (the process of creative destruction through which successful businesses expand while unproductive firms close or are swallowed up by competitors), allowing unproductive businesses to survive because successful businesses do not expand.
Their analysis showed that the low productivity of outside managers in India, which they estimate to be substantially lower than in the US, is one cause of the lack of selection and has negative consequences for India’s economy. It also argues that increasing the efficiency of managerial delegation in India to US standards would increase average firm size by 3 per cent. In contrast, if US businesses had to operate with management practices common in India, the country’s average firm would shrink by about 15 per cent.
A validation study of the Government of India’s Lean Manufacturing Competitiveness Scheme, under which MSMEs are assisted in reducing their manufacturing costs, through proper personnel management, better space utilisation, scientific inventory management, improved process flows and reduced engineering time, covering interventions completed between 2014 and 2018, reported average benefits of Rs 28.35 lakh per unit among the clusters examined.
The lessons are clear: India needs not only to generate new technological capabilities, but also to develop mechanisms through which existing knowledge can be identified, organised and disseminated across firms. The challenge is to make proven production methods, technical solutions and process improvements accessible to enterprises that cannot independently maintain specialised research and management capabilities.
The three Cs of technological progress
How does an economy build these capabilities? One useful starting point comes from the Baconian programme of the seventeenth and eighteenth centuries, which had a major role to play in the Industrial Revolution: counting, classifying and cataloguing.
These three activities helped turn scattered observations into organised, cumulative knowledge. The same logic has relevance for India’s manufacturing ambitions today, specifically for MSMEs.
First, counting. Firms must know their production costs, defect rates, energy consumption, machine utilisation and output per worker. Doubling down on the MSME Competitive (LEAN) Scheme, the budget for which currently remains alarmingly lean, can do most of the work here.
Second, classifying. Measurement becomes more useful when information can be organised into meaningful categories. Indian industry needs a clearer understanding of its technological capabilities across sectors, products, production processes and stages of the value chain.
Which components can domestic firms manufacture competitively? Where does India depend on imported technology? Which industries possess capabilities that can be transferred to other sectors? Accessible classification makes it possible to identify gaps, compare performance and direct investment towards specific capability deficits.
Third, cataloguing. Knowledge must be recorded, accumulated and made accessible. Production experience, engineering solutions, testing results, standards and process improvements should not remain isolated within individual firms or laboratories. They need to contribute to a broader ecosystem of industrial learning.
The three Cs are not substitutes for research and development, engineering talent or capital investment. They are the foundations of a system in which knowledge can accumulate and be deployed more effectively.
Much of the required data already exists across industry associations, manufacturing clusters, testing laboratories, government departments, research institutions and individual firms. The immediate task is to connect these sources, standardise information and make it accessible to businesses that can benefit from it.
First, use existing digital infrastructure to collect industrial data. The collection of information should take place as close to the firms as possible, particularly through district-level industrial offices, state industries departments and established industry associations.
Second, use artificial intelligence to make this information useful to MSMEs. An AI-powered chatbot could serve as a common interface through which firms access information relevant to their particular production problems. A manufacturer could ask why its rejection rate is higher than the industry benchmark or which process improvements have worked for comparable firms.
Third, assign clear responsibility for classification and cataloguing. The Union government should establish common taxonomies and standards for classifying industrial capabilities across sectors, products, technologies and stages of the value chain.
India requires a sharper focus on technology diffusion, process innovation, workforce skills, industrial research and development, and the development of domestic manufacturing ecosystems.
Economic growth ultimately depends on what a society knows and how effectively it puts that knowledge to work. Institutional reforms can remove barriers to productive activity. But India’s manufacturing ambitions will ultimately depend on its ability to diffuse technology beyond a relatively small number of leading firms, and actually make it available to the firms who need it but either lack awareness of its existence or cannot access or afford it.
Steve Rajpurohit is a public policy analyst and writes on Substack.
Steve Rajpurohit posts on X at @SteveRajpurohit.
