In this volatile environment, India must confront a critical but often overlooked challenge: labour productivity. Without determined efforts, our low labour productivity will continue to erode our economy’s growth potential, pushing it into a middle-income trap. Therefore, addressing this gap is not just a policy priority, but an existential imperative.
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In a little over a month since 20 January, when Donald Trump took over as US president, his actions and words have triggered multiple global shocks. He imposed and deferred tariffs on imports from Canada and Mexico, while drawing China into his sights for country-specific trade barriers, and then announced additional duties on steel and aluminium products (a list that has been enlarged since).
Trump’s approach of using tariff threats as a bargaining tool for non-trade objectives has increased policy uncertainty across the world (and within the US too), making it significantly harder for businesses to plan ahead. Whether markets should start pricing in volatility as an ongoing factor remains a pertinent question.
Trump’s tariffs will trigger cyclical, if not structural, inflation in the US, which will impact other developing economies. Additionally, US import barriers against Chinese goods may lead to China dumping its excess production in other markets, undermining domestic industries in those regions.
This could worsen trade deficits, particularly for countries like India that already run a high trade imbalance in general and with China in particular. Moreover, Trump’s across-the-board reciprocal tariffs, under his ‘Fair and Reciprocal Plan’ for bilateral trade, will further escalate global trade tensions, destabilize supply chains and hamper investment flows.
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On the geopolitical front, Trump’s proposal to evacuate Palestinians from Gaza is likely to fuel instability across West Asia. This would worsen widespread public animosity towards Israel and hinder the possibility of normalizing relations between Israel and Arab states.
And then there is Trump’s intervention in Europe and disregard of the North Atlantic Treaty Organization (Nato). Coupled with his push for Ukraine to cede its Russian-occupied territories, abandon its Nato aspirations and grant the US access to its mineral reserves, this could strain US-EU relations beyond repair.
The Trump administration is also seen to be taking partisan sides in Europe’s internal politics, with Germany’s election being a case in point. The turmoil confronting the trans-Atlantic partnership could lead to greater economic uncertainty and weaker global demand.
Also Read: Geopolitics: Brace for a global shake-up now that Trump has rattled Nato
The rise of artificial intelligence (AI) is another tectonic shift that is redefining global economies. Tech giants—Google, Amazon, Meta, and Microsoft—are collectively investing $315 billion in AI, signalling its increasing dominance. However, AI’s rapid growth brings geopolitical challenges, particularly in the context of China’s expanding AI expertise and US attempts to restrict Chinese access to advanced AI technologies.
While technology has historically fuelled economic growth, its impact has been uneven. In manufacturing, automation has significantly boosted productivity. However, in services, which AI primarily affects, productivity gains have been relatively modest so far.
A BCG study of US government data reveals that US software investments as a share of GDP grew from 0.35% in 1970 to 2.4% in 2022, but productivity growth declined from 1.9% to 0.6% over the same period. This suggests that technology has not translated into broader productivity gains at a macro level.
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For the first time, technology poses a real risk of displacing high-skilled workers. This could mean large-scale job losses in high-value sectors. While it comes with advantages, AI could also exacerbate tech-driven polarization between and within nations, leading to adverse ramifications for countries such as India. While Indian policymakers must embrace the opportunities that AI presents, they should prudently evaluate and prepare for its downsides.
Amid these disruptions, India must stay focused on its core development priority: increasing labour productivity, which directly impacts growth in GDP-per-capita. According to the International Labour Organization’s 2025 estimates, India’s labour productivity is a mere $10.7 per hour—less than the minimum wage across 28 US states, and even lower than that of war-torn nations like Yemen and Iraq. This ignominious statistic highlights India’s urgent need for structural reforms.
To improve labour productivity, we must (a) undertake high-impact skill development initiatives, shifting our focus from breadth and language fluency to depth and real-world skills; (b) invest in workforce upskilling and industrial competitiveness, ensuring a quick transition from agriculture to manufacturing; (c) institutionalize land and labour reforms, mitigating regional investment disparities and promoting economic mobility; and (d) adapt technology to productivity needs, leveraging AI and automation judiciously.
Also Read: Arun Maira: Don’t let techo-optimism over AI crowd out concerns of equity
The world is undergoing one of its most volatile phases in decades, marked by high economic uncertainty, geopolitical realignments and technological upheavals.
Amid this flux, we must focus on the fundamentals that will enable us to withstand external shocks and capitalize on global shifts. To secure long-term economic resilience, we must increase labour productivity. Schemes like Skill India and Production Linked Incentives must evolve to address that challenge. But we also need broad-based reforms, backed by public support and a political consensus, and executed with due efficiency by a competent bureaucracy.
The author is a strategy and public policy professional. His X handle is @prasannakarthik.
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