WASHINGTON, D.C. — Strengthening innovation and easing barriers to doing business could significantly lift India’s productivity growth and support its ambition of becoming an advanced economy, according to a new analysis by the International Monetary Fund.
India’s productivity performance over the past two decades has been strong, the IMF said in a report authored by Harald Finger, the Fund’s mission chief for India, and Nujin Suphaphiphat, a senior economist in its Asia and Pacific Department.
The IMF’s 2025 Article IV analysis found that better support for innovation, including removing constraints that limit firm growth, could raise India’s productivity growth rate by nearly 40 percent. The estimated gain would be equivalent to adding the economic output of Karnataka, India’s fourth-largest state by output, to the national economy every decade.
Productivity trends differ sharply across sectors. Services have recorded substantial gains, helped by the adoption of digital technologies and closer integration with global value chains. Manufacturing, by contrast, has seen only modest productivity growth, while agriculture remains far less productive despite employing more than 40 percent of the workforce.
The gap between sectors is wide. An additional worker in services produces more than four times the output of a worker in agriculture with the same level of education. The IMF said this underscores the large potential gains from shifting labor and economic activity toward higher-productivity sectors.
Manufacturing productivity has been held back in part by the dominance of very small firms. Nearly three-quarters of factories in India employ fewer than five paid workers, almost double the share in the United States. The smallest enterprises generate less than 20 percent of the output per worker produced by large firms, compared with nearly 45 percent in the United States.
Many firms remain small for decades, the IMF noted, citing complex compliance requirements, rigid labor regulations, and product market restrictions as key obstacles to growth. Easing these constraints would help firms expand and improve productivity. The Fund said India’s recent announcement to implement new labor codes could help lay the groundwork for further reforms.
Low business dynamism is another factor weighing on productivity. Rates of new firm creation, as well as closures and exits, are much lower than in economies such as South Korea, Chile, or the United States. Limited entry and exit weaken competition and slow the reallocation of capital and labor toward more productive firms.
The analysis also highlighted the presence of a significant number of so-called zombie firms that do not earn enough to cover borrowing costs but continue to operate and absorb resources. Firm entry and exit currently have only a limited impact on productivity in India, reinforcing the need for a more dynamic business environment in which unproductive firms can exit and innovative firms can grow.
Innovation remains a constraint. India invests less in research and development than the average emerging market economy in the Group of Twenty, and relatively few firms engage in R&D. Adoption of foreign technology is also limited. Larger firms tend to innovate more, while smaller firms face barriers to scaling up.
According to the IMF, raising India’s innovation indicators, including measures of business sophistication and creative output, to the 90th percentile among emerging markets could boost productivity growth by nearly 0.6 percentage points. That would represent almost a 40 percent increase compared with India’s long-term average productivity growth rate. (Source: IANS)
