ASIATODAY.ID, NEW YORK — The International Monetary Fund (IMF) has warned that India’s economic momentum could be undermined by stagnating productivity unless business barriers are dismantled and innovation is significantly strengthened.
While India has recorded impressive growth over the past two decades, the IMF cautions that productivity gains are losing traction—particularly in manufacturing and agriculture.
In its 2025 Article IV Consultation, the IMF estimates that stronger support for innovation and pro-business reforms could lift India’s productivity growth by nearly 40 percent—an impact equivalent to adding the output of Karnataka, India’s fourth-largest state economy, every decade. Without such reforms, India risks failing to translate its structural strengths into sustained long-term growth.
Productivity performance remains highly uneven across sectors. Services have delivered robust gains, driven by digital technology adoption and deeper integration into global value chains.
Manufacturing, however, has seen only modest improvements, while agriculture—still employing more than 40 percent of the workforce—remains far less productive.
According to the IMF, a worker in services generates over four times the output of an agricultural worker with the same level of education.
Small Firms Trap Weighs on National Productivity
The IMF identifies India’s unusually large share of micro-enterprises as a key drag on manufacturing productivity. Nearly three-quarters of factories employ fewer than five paid workers, almost double the share in the United States.
More strikingly, the smallest firms produce less than 20 percent of the output per worker generated by large firms.
Complex compliance requirements, rigid labor regulations, and restrictive product-market rules have kept many firms small for decades, limiting their ability to scale and innovate. These constraints weigh heavily on aggregate productivity.
The IMF notes that India’s planned implementation of new labor codes could pave the way for broader reforms—if followed by consistent regulatory simplification.
Low Business Dynamism and the Rise of Zombie Firms
Another major concern highlighted by the IMF is subdued business dynamism. Rates of firm entry and exit in India are significantly lower than in economies such as South Korea, Chile, or the United States, weakening competition and slowing the reallocation of resources toward more productive enterprises.
A growing presence of zombie firms—companies unable to generate sufficient earnings to cover borrowing costs yet continuing to operate—has further distorted resource allocation.
IMF analysis shows that firm turnover currently has only a limited impact on productivity in India, underscoring the need for a more dynamic business environment where inefficient firms can exit and innovative ones can expand.
AI as a Catalyst—With Uneven Gains
The IMF views artificial intelligence (AI) as a potential productivity accelerator. Nearly 60 percent of Indian firms already use some form of AI—well above global averages. AI adoption can enhance efficiency, speed up technology diffusion, and strengthen innovation.
However, uptake remains uneven due to skills shortages, inadequate tools, and integration challenges. Without targeted policy support, AI could widen labor-market disparities.
IMF staff simulations suggest that AI-driven productivity gains—scaled by preparedness and exposure—could raise total factor productivity in emerging Asia, including India, by around 0.3 to 3 percentage points over a decade, depending on sectors and scenarios.
Reform Stakes on the Road to Advanced-Economy Status
The IMF stresses that India has already laid important foundations, including a world-class digital public infrastructure. To avoid a productivity slowdown and unlock the next wave of growth, a coordinated reform agenda is essential: easing regulatory burdens so firms can scale, boosting innovation and university–industry collaboration, strengthening business dynamism, and enabling labor to move into higher-productivity sectors.
Without decisive action, the IMF warns, India’s ambition to become an advanced economy could be constrained by stagnant productivity—despite the scale of the opportunity still within reach. (AT Network)
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