Read more about Imagination from the works of the Mother and Sri Aurobindo.
What is Imagination?
Imagination is the capacity to project oneself outside realised things and towards things realisable, and then to draw them by the projection.  It is really the power of mental formation, when one imagines something they make a mental formation, and depending on the quality and the power of the formation, some people succeed in making what they imagine real.   Everyone has in him, in a greater or lesser measure, the power to give form to his mental activity and use this form either in his ordinary activity or to create and realise something, for often, very often, in these mental imaginations there is a small element of will which tries to realise itself. We are all the time, always, creating images, creating forms.  When this power is put at the service of divine, it is not only formative but also creative.  Imagination is one of the ways of capturing the unknown possibilities of the infinite, it is in its nature a substitute for a truer consciousness's faculty of intuition of possibility: as the mind ascends towards the truth-consciousness, this mental power becomes a truth imagination which brings the colour and light of the higher truth into the limited adequacy or inadequacy of the knowledge, it gives place wholly to higher truth-powers or itself turns into intuition and inspiration; the Mind in that uplifting ceases to be a creator of delusions and an architect of error. Mind then is not a sovereign creator of things non-existent or erected in a void: it is an ignorance trying to know; its very illusions start from a basis of some kind and are the results of a limited knowledge or a half-ignorance.   The mind has not the omniscience of an infinite Consciousness; it is limited in knowledge and has to supplement its restricted knowledge by imagination and discovery.  But it is to be noted that through imagination the mind does receive a figure of truth, does summon possibilities which are afterwards realised, does often by its imagination exercise an effective pressure on the world's actualities. 
Imagination in Children
Children are not as "concretised", materialised in their physical consciousness as older people—as one grows up, it is as though one is coagulated and becomes more and more gross in one's consciousness unless through a willed action one develops otherwise. For instance, the majority of children find it very difficult to distinguish their imagination, their dreams, what they see within themselves from outer things. The world is not as limited as when one is older and more precise. And they are extremely sensitive within; they are much closer to their psychic being than when they are grown up, and much more sensitive to the forces which, later, will become invisible to them—but at this moment are not. 
Why is Imagination Important?
People who can open to a higher region, a higher force which, passing through the mental layers, comes and takes a form in a human mind and reveals itself in the world as new truths, new philosophical systems, new spiritual teachings, which are the works and at the same time the actions of the great beings who come to take birth on earth. That is an imagination which can be called "Truth-imagination". These higher forces, when they come down into the earth-atmosphere, take living, active, powerful forms, spread throughout the world and prepare a new age.  Men of science must be having imagination! A lot. Otherwise they would never discover anything. One can obviously have progressive and regressive imaginations. There are people who always imagine all the catastrophes possible, and unfortunately they also have the power of making them come. It's like the antennae going into a world that's not yet realised, catching something there and drawing it here. Then naturally it is an addition to the earth atmosphere and these things tend towards manifestation. It is an instrument which can be disciplined, can be used at will; one can discipline it, direct it, orientate it. It is one of the faculties one can develop in himself and render serviceable, that is, use it for definite purposes. 
If one didn't have the capacity of imagination he would not make any progress. One's imagination always goes ahead of one's life, usually one imagines what one wants to be, and this goes ahead, and then one follows, then it continues to go ahead and one follows. Imagination opens for one the path of realisation. People who are not imaginative—it is very difficult to make them move; they see just what is there before their nose, they feel just what they are moment by moment and they cannot go forward because they are clamped by the immediate thing.  One must have a lively power of imagination for—there is a world in which you are the supreme maker of forms: that is your own particular vital world. You are the supreme fashioner and you can make a marvel of your world if you know how to use it. If you have an artistic or poetic consciousness, if you love harmony, beauty, you will build there something marvellous which will tend to spring up into the material manifestation. 
The power of mental formation is most useful in Yoga also; when the mind is put in communication with the Divine Will, the supramental Truth begins to descend through the layers intervening between the mind and the highest Light and if, on reaching the mind, it finds there the power of making forms it easily becomes embodied and stays as a creative force in you. 
How to Cultivate Imangination?
A good deal of our life embodies the products of our imagination. Every time we indulge our imagination in an unhealthy way, giving a form to our fears and anticipating accidents and misfortunes, we are undermining our own future. On the other hand, the more optimistic one’s imagination, the greater the chance of one realising their aim. Therefore, never be dejected and disappointed but let your imagination be always hopeful and joyously plastic to the stress of the higher Truth, so that the latter may find you full of the necessary formations to hold its creative light.  Stop imagining wrong things and your miseries will stop at the same time.  The source from which these imaginations come has nothing to do with the reason and does not care for any rational objections. They come either from the vital mind, the same source from which come all the fine imaginations and long stories which men tell themselves in which they are the heroes and do great things or they come from little entities attached to the physical mind which pick up any random suggestion anywhere and present it to the mind just to see whether it will be accepted, or an unbalanced vital and a weak nervous system apt to follow its own imaginations and unruled impulses without any true mental will or strong vital will to steady or restrain it. If one watches oneself closely one can find the most queer and extraordinary or nonsensical things crossing the mind or peeping in on it in this way. Usually one laughs or hardly notices and the thing falls back to the world of incoherent thought from which it came.   But if one stands back or ascends a step, one can look at all these things, put them in their place, keep some, destroy or get rid of those one does not want and put all one's imaginative power—what is called imaginative—only in those one wants and which conform with one's highest aspiration. That is what it means to control one's imagination. 
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Read more about Imagination from the works of the Mother and Sri Aurobindo.