Business Growth and Innovation Can Boost India’s Productivity

IMF News, January 29, 2026

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Strengthening innovation could help boost productivity growth by 40 percent, equal to adding the output of the country’s fourth-largest state economy.
The finding is presented in the IMF’s 2025 Article IV report and reiterated in this overview by Harald Finger and Nujin Suphaphiphat (January 28, 2026).
India’s recent productivity expansion reflects rapid growth in high-value services, efficiency-enhancing reforms, and scale advantages from a large domestic market, but additional gains are needed to reach advanced-economy ambitions.

Services have delivered strong productivity gains, benefiting from advances in adoption of digital technology and integration into global value chains.
Manufacturing has seen only small productivity growth.
Agriculture remains far less productive and still employs over 40 percent of the workforce.
An additional worker in services produces more than four times the output of a worker in agriculture with the same education level, highlighting large potential gains from shifting activity across sectors.

Nearly three quarters of factories employ fewer than five paid workers—almost double the US share.
The smallest enterprises produce less than 20 percent of the output per worker of large counterparts, compared with nearly 45 percent in the United States.
Many enterprises remain small for decades due to complex compliance requirements, rigid labor regulations, and product market rules that discourage growth.
Business dynamism is low: the frequency of new business creation and firm exit is far lower than in economies such as Korea, Chile, or the United States.
A sizable share of firms are “zombie firms” that do not generate enough earnings to cover borrowing costs yet continue to absorb capital and labor.
Firm entry and exit have only a small effect on productivity in India, indicating the need for a more dynamic environment where unproductive firms can exit and more productive or innovative firms can scale.

India invests less in research and development than the average for emerging market economies in the Group of Twenty.
Few firms engage in R&D and there is limited adoption of foreign technology; larger firms tend to innovate more while smaller firms face stronger barriers to scaling up.
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.

Nearly 60 percent of Indian firms already use some form of AI—well above global averages.
AI can improve efficiency, speed up technology diffusion, and strengthen innovation, but adoption is uneven due to skill shortages, inadequate tools, and integration challenges.
Ensuring AI enhances productivity without widening disparities requires further investment in digital infrastructure, worker training, and protections for those who may lose jobs.
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 roughly 0.3 to 3 percentage points over a decade—depending on sectors and scenarios.

Ease regulatory burdens so firms can grow (address complex compliance requirements and product market rules).
Implement and build on labor code reforms to increase flexibility and support firm expansion.
Boost innovation and university-industry collaboration to promote R&D and technology adoption.
Strengthen business dynamism to facilitate beneficial firm entry and exit and reallocation of resources.
Enable labor mobility to higher-productivity sectors through training, skills development, and targeted support.
Invest further in digital public infrastructure and workforce training to maximize AI benefits while protecting vulnerable workers.

Source: Business Growth and Innovation Can Boost India’s Productivity, Harald Finger and Nujin Suphaphiphat, January 28, 2026, IMF.

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