Washington, Jan 29 (NationPress) Enhancing innovation and reducing business impediments could significantly elevate India's productivity growth and aid its ambition of becoming an advanced economy, as revealed by a recent analysis from the International Monetary Fund.

Over the last two decades, India has experienced robust productivity growth, according to an IMF report authored by Harald Finger, the IMF’s mission chief for India, and Nujin Suphaphiphat, a senior economist in the Fund’s Asia and Pacific Department.

The Fund’s 2025 Article IV analysis indicates that improved support for innovation, including the removal of constraints hindering firms, could elevate India's productivity growth rate by nearly 40 percent. This increase would be akin to adding the output of Karnataka, the nation’s fourth-largest state by output, to the economy every decade.

Productivity trends differ significantly across sectors. The services sector has shown remarkable gains, driven by the adoption of digital technology and closer integration with global value chains. In contrast, manufacturing has witnessed only modest productivity growth. Agriculture remains less productive, despite employing over 40 percent of the workforce.

The disparity between sectors is notable. A worker in services generates over four times the output of a worker in agriculture, even with similar education levels. The IMF highlights the potential for substantial gains by reallocating labor and activity to sectors with higher productivity.

One key factor impeding manufacturing is the prevalence of small firms. Nearly three-quarters of factories employ fewer than five paid workers, nearly double the share in the United States. The smallest enterprises produce less than 20 percent of the output per worker compared to large firms, whereas in the United States, this figure is nearly 45 percent.

Many of these enterprises remain small for extended periods. Complex compliance regulations, rigid labor laws, and product market restrictions hinder growth. Easing these constraints would facilitate firm expansion and enhance productivity. The IMF notes that India’s recent announcement regarding new labor codes could pave the way for further reforms.

Another factor dampening productivity is low business dynamism. The rates of new firm creation, alongside firm closures and exits, are considerably lower than in economies like Korea, Chile, or the United States. Limited entry and exit weaken competition and impede the movement of capital and labor towards more productive firms.

The analysis also identifies a significant number of zombie firms, which do not generate enough revenue to cover their borrowing costs but continue to consume resources. Currently, firm entry and exit have minimal impact on productivity in India. The IMF emphasizes the need for a more dynamic business environment, where unproductive firms can close down, and innovative firms can thrive.

Innovation continues to face constraints. India invests less in research and development than the average emerging market economy within the Group of Twenty. Few firms engage in R&D, and the adoption of foreign technology remains limited. Larger firms tend to innovate more, while smaller firms encounter obstacles to scaling up.

The IMF estimates that enhancing India’s innovation indicators, such as business sophistication and creative outputs, to the 90th percentile among emerging markets could boost productivity growth by nearly 0.6 percentage points. This would represent an almost 40 percent increase compared to India’s long-term average.