Capital deepening has weakened and our productivity has stalled

Mobilizing labour and capital isn't enough. India must make more efficient use of both for sustainably higher GDP growth

- SAUMITRA BHADURI

India is at the threshold of one of the most promising economic decades in its modern history, yet the hard arithmetic underlying growth reflects a more fragile situation than our headline GDP figures suggest. Economists apply the Sala-i-Martin framework to break growth down into its core components and ask a simple-yet-powerful question: How much of the rise in output per worker can be attributed to the use of more capital (a single factor of production), and how much can be attributed to India becoming more productive on the whole? The results from India's growth decomposition between 1990 and 2023 reflect the emergence of a two-pronged challenge: capital deepening is now uneven and no longer accelerating, while total factor productivity (TFP) has remained stubbornly stagnant.

Trendlines demonstrate that India's capital deepening has followed an inverted-U path: it increased steadily through the 1990s and early 2000s, peaked around the mid-2000s, and then gradually declined-consistent with a slowdown in India's investment cycle after 2011. By contrast, TFP exhibits a shallow rise in the early reform years, a long plateau and then a noticeable downward bend after the mid-2010s; this indicates that productivity gains have not been continuous. Both curves reveal that neither capital deepening nor TFP is on an upward long-term trajectory, which reinforces the concern that India's growth engines are weakening rather than strengthening.