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Informist, Thursday, Jan. 29, 2026

 

--IMF: Business growth, innovation can boost India's productivity 

--IMF: Strengthening innovation can boost India productivity growth by 40% 

 

NEW DELHI – Strengthening innovation, including by removing business barriers, could help boost productivity growth in India by 40%, according to the International Monetary Fund. This productivity dividend, the Fund said, would be equal to adding the output of Karnataka, the country's fourth-largest state economy.

 

"India's productivity growth over the past two decades has been impressive, reflecting rapid expansion in high-value services, gradual efficiency-enhancing reforms, and scale advantages from a large domestic market," IMF's Mission Chief for India Harald Finger and Senior Economist Nujin Suphaphiphat said Thursday. "That said, additional gains would support the country's ambitions of becoming an advanced economy." 

 

The Fund forecasts India's GDP growth for the current financial year ending March at 7.3% and for FY27 at 6.4%. India's economy is seen growing 7.4% in FY26, as per the government's first advance estimate. The government has set a goal for India to become a developed economy by 2047.

 

India's productivity performance, measured by output per additional worker, has been uneven, the Fund said. While the services sector benefitted from adoption of digital technology and delivered strong productivity gains, manufacturing has seen only small productivity growth, Finger and Suphaphiphat noted. 

 

Agriculture, which employs over 40% of India's workforce, remains far less productive than other sectors, the Fund said. "In fact, an additional worker in services produces more than four times the output of a worker in agriculture with the same education level, underscoring the large potential gains from shifting activity to other sectors of the economy."

 

A key reason why manufacturing productivity has fallen behind in India is the unusually large share of very small firms, the Fund said. Nearly 75% of factories employ fewer than five paid workers, almost double the share in US. The smallest enterprises produce less than 20% of the output per worker of large counterparts, compared with nearly 45% in the US, the Fund said.

 

"These challenges reduce India's aggregate productivity. Many of these enterprises remain small for decades due to complex compliance requirements, rigid labor regulations, and product market rules that discourage growth. Easing these constraints would help businesses expand and, in turn, dramatically lift productivity."

 

Another factor underlying India's subdued manufacturing productivity is that business dynamism remains low. The frequency of new business creation and when firms close or exit a market is far lower than in economies such as Korea, Chile, or the US, the IMF said. "Subdued dynamism discourages competition and slows the reallocation of resources toward more productive entities."

 

Innovation has also remained constrained. India invests less in research and development than the average for emerging market economies in the Group of 20. Few firms invest in R&D and adoption of foreign technology is limited, the Fund said. "Strengthening innovation could deliver substantial productivity gains....lifting India's innovation metrics, including business sophistication and creative outputs, to the 90th percentile of emerging markets could raise productivity growth by almost 0.6 percentage point, or nearly 40 percent relative to India's long-term average."

 

Artificial intelligence can make businesses more efficient, speed up technology diffusion, and strengthen innovation for Indian businesses, Finger and Suphaphiphat said. IMF staff simulations show that AI-driven productivity gains—scaled by AI preparedness and exposure—could raise total factor productivity in emerging Asia, including India, by around 30 to 300 basis points over a decade.  End

 

Reported by Shubham Rana

Edited by Avishek Dutta

 

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