International Monetary Fund analysis finds easing business barriers and strengthening innovation could raise India’s productivity growth by nearly 40 percent

The International Monetary Fund published analysis arguing that India could materially lift its productivity trajectory by better supporting innovation and removing barriers that keep firms small. Drawing on its 2025 Article IV work, the IMF estimates that these reforms could boost the productivity growth rate by nearly 40 percent, an increase it likens to adding the decade-by-decade output of Karnataka, India’s fourth-largest state economy. The note highlights uneven sectoral performance, with strong gains in services but weak manufacturing productivity and persistently low agricultural productivity, despite agriculture still employing over 40 percent of the workforce. It points to India’s unusually large share of very small manufacturers, complex compliance requirements, rigid labor regulations and product market rules that discourage firm growth, alongside low business dynamism and a meaningful presence of “zombie” firms; it notes India’s announcement to implement new labor codes as a potential platform for further reform. On innovation, the IMF finds India invests less in research and development than the average emerging market economy in the Group of Twenty and estimates that raising innovation metrics to the 90th percentile of emerging markets could increase productivity growth by almost 0.6 percentage point, or nearly 40 percent relative to India’s long-term average; it also notes that nearly 60 percent of Indian firms already use some form of artificial intelligence, while IMF simulations suggest AI-driven gains could raise total factor productivity in emerging Asia by roughly 0.3 to 3 percentage points over a decade depending on sector and scenario.