IMF says innovation can boost the productivity growth rate by nearly 40%

International Monetary Fund or IMF has stated in a latest update that India's productivity growth over the past two decades has been impressive, reflecting rapid expansion in high-value services, gradual efficiency-enhancing reforms, and scale advantages from a large domestic market. That said, additional gains would support the country's ambitions of becoming an advanced economy. Better supporting innovation, including by removing business barriers, can boost the productivity growth rate by nearly 40 percent, as the fund shows in its 2025 Article IV report. That significant productivity dividend would be like adding the output of the state of Karnataka, the fourth-largest state by output, to India's economy each decade.

IMF noted that domestic business dynamism remains low. The frequency of new business creation and when firms close or exit a market is far lower than in economies such as Korea, Chile, or the United States. Subdued dynamism discourages competition and slows the reallocation of resources toward more productive entities. It stated that Artificial intelligence could reinforce these gains. Nearly 60 percent of Indian firms already use some form of AI-well above global averages. AI can make businesses more efficient, speed up technology diffusion, and strengthen innovation. 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.

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