Why IMF says India must fix its data, industry strategy and human capital

From poor quality data to subsidy-driven industrial push, zombie firms, inadequate investments in human capital and R&D, the IMF lists several areas for improvement

A Staff Report of the International Monetary Fund (IMF), released on November 26 after several rounds of discussions with Indian Indian officials and industry leaders, reveals several structural reforms India must undertake to boost productivity, reinvigorate private investment, create high-quality jobs and raise growth potential.

Though sweeping in its suggestions, a few need attention. The most critical of these in the current context of unexpected high growth in Q1 and Q2 is “enhanced quality, availability and timeliness of macroeconomic and financial statistics”.

Rebuilding credible statistical system

In fact, the IMF puts a big question mark on the quality of official statistics by putting India’s national accounts statistics (NAS) in ‘C’ grade – one above the last grade. The NSA data include national income and expenditure data (GDP), savings and investments by households, public and private sectors entities and many others.

The IMF finds flaws in methodology, quality and volume of official data collected and rates and ratios used for converting inputs into outputs. It questions the “outdated” baselines for GDP, inflation (CPI, WPI), industrial production (IIP), consumption surveys (HCES), unincorporated enterprises (ASUSE), labour force (PLFS), organised manufacturing (ASI), debt and investment survey of households etc. which capture the structural changes in the economy.

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It also flags poor quality of quarterly GDP estimates, inadequate capture of informal sector that contributes nearly half to the GDP, lack of services production index (SPI) and Producer Prices Index (PPI) – the last one at the root of “excessive use of single deflation” (single deflation) which leads to over- or underestimation of GDP numbers. It asks for eliminating “sizable discrepancies” between production and expenditure approaches that creep into the GDP numbers.

These are a sorry comment on the Indian statistical system once hailed by the world. In 2005, two eminent economists Angus Deaton and Valerie Kozel wrote, “most countries can only envy India’s statistical capacity”.

Reimagining industrialisation

Another key area that the IMF flags for reform is India’s industrial policies and its excessive reliance on the PLI subsidy schemes to drive manufacturing. It says, the PLI schemes are “no substitute” for horizontal structural reforms in industry – to improve overall conditions for industrialisation – and that the schemes’ overall execution (across schemes) is very limited with an “aggregate execution rate of 18 per cent”.

For better outcomes, it advocates for higher spending on education, skilling and health (human capital), social security for informal workers, creation of quality jobs, implementation of new labour codes and an industrial policy that should “correcting market failures” while “minimizing potential costs to public finance and resource allocation”.

India’s R&D spending remains very poor (historically low of 0.7 per cent of GDP, as per the NITI Aayog), significantly less than the G20-EM average (OECD average of 3 per cent and South Korea’s 5.2 per cent ). The IMF says India should not only spend more on R&D but rope in universities and private companies and ensure their linkages for innovation and productivity.

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In addition, it asks India to dismantle protectionism for domestic industry by removing trade barriers (which India is doing in piecemeal, starting with its FTA with the UK), better integration through trade agreements with bilateral and regional partners to bolster competitiveness and attract FDI.

'AI will affect India severely'

An aside: In a recent interview with an Indian magazine, South Korean economist Ha-Joon Chang explained why India failed to industrialise despite ‘Make in India’ and South Korea’s chaebol-type “national champions” model. He said Indian business elites “do not want serious industrialisation…they are either in the financial sector or even if in the industrial sector, they still have very strong links with financial capital which doesn’t like industrialisation because, for them, the most important thing is the rate of return”.

Speaking about “all kinds of protection and subsidies using taxpayer money” for business elites, Chang drew the difference in the approach of Japan, South Korea and Taiwan that ensured that they delivered in terms of productivity, employment and exports. He explained: “As a government, you do not want to just give money away in the hope that, somehow, they will deliver. Some of them will, but others won’t. You have to make it clear that this is conditional support – if companies do not perform in, say, 10 years, you will pull the rug from beneath their feet.”

Chang also sounded an alarm for India’s export-oriented services sector.

He said India’s export-oriented services are largely in “relatively low value-add sectors” like back offices, call centers and low-level software coding. These sectors have failed to upgrade and will be hit hard by artificial intelligence (AI). He warned: “India will be one of the biggest casualties of AI. It needs to get out of there; it needs to industrialise.”

15 per cent ‘zombie firms’

The IMF expresses concerns at low firm dynamism with less than 1 per cent entry and exit rate – far below 8-13 per cent annual rates in the US, Europea, South Korea and Chile. It says, India’s 15 per cent operating firms are “zombie” or “inefficient”, which don’t generate enough earnings to cover their interest expenses and have very low levels of productivity – reflecting structural rigidity. The situation may have improved with the Insolvency and Bankruptcy Code (IBC) but the code also needs reforms to create a more dynamic business environment.

Building human capital

The IMF also focuses on another area often talked but never paid attention to: human capital development.

It points to inadequacies in education and skill levels which “required for productive employment” and “elevated” wasting and stunting of children. Unless these are addressed, it warns, India wouldn’t be able to harness its demographic dividend.

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India’s average education and health spending have remained low for years – at 2.8 and 1.6 per cent of GDP, respectively (Economic Survey 2023-24) – despite repeated calls for quantum jumps. The World Bank advises all low and low-medium income countries like India to raise education spending to 4-6.5 per cent of GDP. The National Health Policy of 2017 sought health expenditure at 2.5 per cent of GDP by 2025. Ernst & Young wrote in March 2025, for India to achieve Viksit Bharat goal it must raise education and health spending to 6.5 per cent and 4 per cent of GDP, respectively.

Private participation in climate finance

While recognising India’s push for renewable energy and other climate-mitigation efforts, the IMF cautions that relying entirely on government spending could lead to “high long-term risk of sovereign stress”. Instead, it asked India to push for greater private participation and external financial support, technology transfers.