Economic success is about relative strengths: Here’s a four-point plan to make India’s economy competitive

This statement by India’s finance minister Nirmala Sitharaman in this year’s budget speech set a clear imperative: that productivity and competitiveness are not incidental to India’s growth story, but necessary conditions for its long-term economic development.

Its significance has grown clearer since. The Iran-US war has had cascading effects across the globe, again underscoring that in a world of geopolitical disruption, competitiveness is not a policy aspiration but a structural necessity.

Against this backdrop, two questions are central. What is the current state of India’s competitiveness? And what does it reveal about the country’s capacity to absorb external shocks and sustain growth in a world of flux?

Competitiveness, as a concept, is best understood through the lens of productivity. The foundations of a country’s competitiveness lie in the set of policies, institutions and factors that shape how efficiently an economy extracts value from its factors of production such as labour, capital and natural resources. It is this efficiency, sustained over time, that determines whether growth translates into enduring prosperity.

To examine this question rigorously, the Institute for Competitiveness is publishing the State of India’s Competitiveness Report. It offers a systematic diagnosis of how efficiently India develops and deploys its productive factors.

As highlighted in the report, India’s productive landscape has seen significant improvements in recent years. Output per worker grew by nearly 3.8% annually during 2010-24, higher than in advanced economies such as the US (1.2%) and EU (0.7%). However, its output per worker stands at merely $5,964 (in constant 2015 dollars), much lower than that of the US ($133,850), EU ($77,398), China ($25,030), Vietnam ($ 7,272) and Indonesia ($8,819).

This shows that despite recent growth, India still has a long way to go in catching up even with Asian economies like China and Vietnam, which have been experiencing higher growth in output per worker at 6.5% and 5.2% annually, respectively.

Our low level of productivity translates into low levels of prosperity, as reflected by India’s GDP per capita, which stands at only $2,397, well below levels across advanced economies such as US ($66,356) and Australia ($61,481). Even among emerging markets, India’s GDP per capita is lower than that of Vietnam ($4,018), Indonesia ($4,368) and Brazil ($ 9,567).

However, like its trajectory of productivity, India’s prosperity level has grown at an impressive rate of nearly 4.9% annually, higher than that of the US (1.7%), EU (1.2%) and Japan (0.9%), but lower than that of China (6.1%) and Vietnam (5%).

India’s low absolute prosperity is attributable not only to lower productivity, but also to lower economic participation. India’s employment-to-population ratio stands at 53.2%, indicating that only about half its people are engaged in economic activity. Compared with other countries, India again lags behind Vietnam, with 72.6% of its population employed, compared with 62.4% in China.

The report also highlights variation in economic structures across economies. India remains among the most agriculturally intensive countries, with 16.2% of its gross value added (GVA) contributed by the sector. India’s manufacturing share remains modest at 13%, compared with China’s 25.5% and Vietnam’s 24.2%. India’s service sector’s share in total GVA stands at 49.5%, lower than that of advanced economies such as Japan (69.8%) and the EU (65.5%).

Taken together, these numbers paint a picture of an economy that is yet to complete its structural transformation, with all three major sectors lagging those in other economies.

Material prosperity is only one dimension of the analysis. The other, equally consequential, is social progress or the degree to which an economy translates growth into improved well-being for its citizens.

The report sheds light on the state of social progress in the country through the findings of a Social Progress Index. India scored 58.79 on this, ranking 109th among 171 countries. India ranked below countries such as Australia, Japan, the US, Vietnam and China, all of which are more productive than India.

We face a double disadvantage. Not only is material prosperity low, the country is unable to deliver the broader conditions of well-being to its citizens.

Moving forward, India’s competitiveness will be significantly shaped by two forces defining the new economic landscape: climate change and artificial intelligence (AI).

AI is transforming the nature of jobs and employable skills, whereas climate change continues to introduce new vulnerabilities and constraints on an economy’s efficient use of resources. Navigating both aspects is crucial for maintaining competitiveness and achieving productivity gains and would require key measures and steps.

In this context, the report proposes 4Ts: Talent development, technological evolution, transforming existing innovation systems and a transition to climate-resilient growth.

Acquiring competitiveness is not a sprint but a marathon, and marathons are never won on the actual day of the race. They are won in the months of disciplined preparation that come before. These four imperatives form that very preparation. And India must commit itself to them with urgency.

In this race, India has shown endurance but must now increase its pace.

The authors are, respectively, chair and senior researcher at Institute for Competitiveness.