Source: UN News: Monday, February 16, 2026 00:01 AM
According to the International Monetary Fund (IMF), better support for innovative solutions and reducing barriers to trade can accelerate India’s productivity growth, which will help the country achieve its goal of becoming a developed economy. The rapid expansion of high-value services, efficiency-boosting reforms and the benefits of a large domestic market have driven India’s strong productivity growth over the past two decades, according to a new report from the International Monetary Fund. However, further reforms are required to maintain this progress. According to the report, if innovation is strengthened and trade and regulatory barriers are reduced, India’s productivity growth could increase by about 40 percent. Its impact will be so large that every decade the country’s economy will add an output equal to that of Karnataka, India’s fourth largest state economy. The level of productivity has varied significantly in different regions. There has been good growth in the services sector, which has been strengthened by digital technology and connectivity with global markets. In contrast, improvements in manufacturing have been limited, while the agricultural sector – which still employs more than 40 percent of the population – remains less productive than other sectors. Compared to an agricultural worker with the same education, a service sector worker produces four times more output. It is clear from this that workers moving to high productivity sectors can provide huge benefits. The International Monetary Fund says that the large number of very small enterprises in India is affecting manufacturing productivity. Complex regulations, strict labor laws and market barriers prevent many industries from growing. Plans to implement new labor laws can help reduce these barriers and open the way for further reforms. Poor mobility and less competition in businesses are also weakening productivity. The rates of opening of new businesses and closure of old businesses in India are lower than countries like Republic of Korea, Chile and America. This limits competition and resources do not reach more productive companies. According to the International Monetary Fund, there are many “zombie companies” that are unable to even pay the interest on loans with their earnings. Despite this, they keep working and retain capital and labor. As a result, these same resources do not reach new, better, and more productive companies, impacting the productivity of the entire economy. India’s investment in innovation is lower than many other emerging economies. Spending on research and development is also below the average for G-20 emerging economies, and the number of companies involved is also lower. According to the International Monetary Fund, if India’s innovation standards reach the top level among emerging markets, productivity growth could increase by about 0.6 percent. This will be about 40 percent more than India’s long-term average growth. The role of AIArtificial intelligence (AI) can further strengthen these gains. About 60 percent of Indian companies are already using AI in some form, which is much higher than the global average. AI makes work faster and more efficient, and also accelerates the spread of new technology. However, its use is not uniform everywhere due to lack of skills, limited resources and challenges in adopting the technology. According to the International Monetary Fund, productivity gains from AI could increase the overall productivity of emerging Asia, including India, by 0.3 to 3 percentage points over the next 10 years. According to the IMF, broader reforms are needed to take productivity to the next level. This includes simplifying regulations, increasing innovation and collaboration between universities and industry, strengthening competition in business and giving workers opportunities to move to more productive sectors. With these reforms, India will be able to make better use of its strong foundation and digital public infrastructure and move towards becoming a developed economy.
