Esenthel has good graphics, but I was wondering if you'd some time in the future if you will be improving graphics to be competitive with engines such as the Cry 2 Engine.

what features do you mean specifically?

Some examples would be more dynamic lighting/shading, greater poly limit, and better water physics.

Lights and shadows are fully dynamic.
There is no poly limit.

But yes, water will be improved in the future.

Well what about advanced physics or the option to choose how smart it is (ragdoll or advanced).

What about physics for foliage like in Crysis allowing you to run through a fern and the fern animates properly accordingly to physics - not a preset animation.

well you've got ragdoll enabled by default (like in Bloody Massacre tutorial demo)
If you have some more complex physics samples in mind please post a link to a video

foliage with physics will be in the future

One physics engine that is really awesome which is used in games like Grand Theft Auto IV is "Euphoria: Natural Motion" engine.
<!-- m --><a class="postlink" href="http://www.naturalmotion.com/euphoria.htm">http://www.naturalmotion.com/euphoria.htm</a><!-- m -->

yeah the video on that website looks awesome, but this would require very big ammount of work