IMF Working Paper - Credit and Product Innovation in Emerging Markets: Evidence from India
SDG 9: Industry, Innovation & Infrastructure | SDG 8: Decent Work & Economic Growth
Institutions: Ministry of Finance | Ministry of Commerce & Industry
This IMF working paper explores how extending bank credit access influences product innovation in Indian manufacturing firms. The authors find that, following a credit‐eligibility reform, newly credit‐eligible firms increased borrowing, but, on average did not introduce new products or expand into more complex products. Instead, most used credit to scale existing product lines, constrained by operating below efficient scale and encountering market, managerial, and capability barriers. However, in the subset of firms that did not face these extra constraints, credit access did spur innovation, mirroring patterns in advanced economies.
What is Product Innovation? → The process by which firms develop new or improved products, increasing variety, complexity, functionality or servicing new markets.
In India, expanding credit to SMEs and manufacturing firms is a priority, but this research cautions that credit alone may not translate into innovation. To convert credit into higher‐value industrial transformation, the government must complement credit expansion with support for firm capabilities (R&D, technical skills, managerial training), market reforms (competition, input markets), and economies of scale. Policy should also identify and remove firm-specific binding constraints so that access to finance can unlock innovation rather than just expansion.
Relevant Question for Policy Stakeholders:
How should India design integrated policies (finance + capability + market reforms) to ensure credit leads to substantive product innovation in manufacturing?
Follow the full paper here:
Credit and Product Innovation in Emerging Markets: Evidence from India (IMF WP/2025/192)