India's AI Revolution: Can Tech-Driven Growth Propel the Country to New Economic Heights
The innovativeness, transition to the use of artificial intelligence, and changes in regulations hindering the development of businesses will help India to enter a new phase of economic growth. Recent analysis by the International Monetary Fund indicates that productivity growth could increase by almost 40 percent if the country manages to remove impediments that bar the expansion and creativity of firms. This would be economically meaningful, a boost to scale equal to adding the output of one of India's largest state economies to the national production every decade.
The productivity increase in India during the last 20 years has been mainly propelled by the high growth of high-value service sectors, digitalization, and greater penetration into the global economy. Statistics indicate that the output per incremental worker in the services sector is much more than that in the agricultural sector, and this indicates the increased role of technology and knowledge-based industries. The manufacturing industry has not been as successful, though. One of the strongest weaknesses is the prevalence of very small companies (most of them have difficulty scaling because of the complicated compliance processes, strict labor regulations, and limitations of the market). Such structural problems decrease the efficiency and slacken the overall productivity development. Another concern is that of business dynamism. Compared to developed and emerging economies, the entry and exit of firms are lower in India, and this inhibits the process of competition and reduces the rate at which capital and labor are transferred to ventures that are more productive. Another reason, as advanced by economists, is that there are so-called zombie companies that survive on low profitability and consume resources that could otherwise be used to contribute to innovation-driven firms.
Even though innovation is underutilized, spending on research and development is less compared to other peer economies. However, the growing digital environment and the rapid adoption of AI in the country are major opportunities. Moreover, nearly 60 percent of Indian companies are said to use some form of AI, meaning that they are well prepared to change technologically. Analysts point out that to ensure AI-driven growth is inclusive, investments in skills training and digital infrastructure, and supporting policies would be essential. A set of more closely synchronized reforms aimed at innovation, competitiveness, and labor mobility might enable India to make a major step toward becoming an advanced-economy nation in the long term.
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