India could achieve only $21.91 trillion in GDP by 2046-47, falling nearly $8 trillion short of its Viksit Bharat target without deeper labour market reforms, according to an NCAER paper.
The study says India needs annual total factor productivity (TFP) growth of about 6.1% for over two decades, warning that demographics and capital investment alone will not be sufficient.
The authors identify labour market distortions as the biggest drag on long-term growth, arguing that smoother labour mobility and implementation of the four labour codes could significantly improve productivity and economic output.
Weak Productivity, Labour Bottlenecks Threaten India's $30 Trillion Goal
A new NCAER paper argues that stronger labour market reforms and sustained productivity gains are essential if India is to achieve its Viksit Bharat goal of becoming a $30 trillion economy by 2047
Summary
Advertisement
Labour reforms remain necessary for India to reach a $27trn economy and approach its $30trn GDP goal by 2047. Without these policy changes, output is projected to hit only $21.91trn by 2046-47 under the most optimistic scenario, falling roughly $8trn short of the target.
The findings were detailed in a paper, India’s Development Aspirations: A Macroeconomic Perspective, authored by Alok Johri of McMaster University and Amartya Lahiri of the University of British Columbia for the National Council of Applied Economic Research (NCAER), a New-Delhi based economic think-tank that works in the public policy space.
The paper is slated for discussion at the NCAER India Policy Forum in New Delhi, which runs from August 6-8. \
The event will feature Finance Minister Nirmala Sitharaman, Reserve Bank of India Deputy Governor Poonam Gupta, former 16th Finance Commission Chairman Arvind Panagariya and Infosys co-founder and Chairman Nandan Nilekani.
Productivity Growth Challenge
India requires an economy-wide total factor productivity (TFP) growth of about 6.1% annually for 24 years to hit the $30trn target, the paper stated. TFP—a metric that measures the efficiency with which an economy uses labour and capital to generate output—remains a persistent hurdle.
Advertisement
Historically, India has struggled to maintain high productivity. The country's economic acceleration after liberalisation was largely driven by capital accumulation rather than productivity improvements.
Overall TFP growth remained subdued and eventually turned negative after 2016.
The authors compared India’s performance with developing peers at similar stages of economic development. India’s GDP and productivity expanded significantly slower than those of China and South Korea.
Even Brazil, which recorded lower per-capita income growth at a comparable stage, registered faster TFP growth than India between 2000 and 2022.
India’s two most consequential economic challenges are weak productivity growth and labour-market frictions, Johri and Lahiri said. Favourable demographics and continued capital accumulation alone will not be enough to achieve the Viksit Bharat target.
Fixing Labour Distortions
Labour-market distortions represent the largest drag on India’s potential output, the study stated. Removing these bottlenecks would encourage the workforce to shift away from agriculture towards more productive industrial and services sectors.
Advertisement
Johri and Lahiri detailed the impact of addressing these structural issues. While no single reform achieves the $30 trillion target, removing the labor wedge has the biggest impact and gets to within touching distance of the target, they pointed out.
"Reducing labour market distortions can significantly increase the TFP growth required to hit the $30tn GDP target," Johri and Lahiri said.
To streamline compliance, modernise outdated provisions, promote ease of doing business and protect worker rights, the government has initiated a consolidation effort. It merged 29 existing labour laws into four broad frameworks: the Code on Wages, the Industrial Relations Code, the Code on Social Security and the Occupational Safety, Health and Working Conditions Code, 2020.
Around 30 states and union territories have already published draft rules aligning with these four codes. Nearly 20 of those regional jurisdictions have implemented the changes.
Advertisement