The Productivity measures the efficiency with which various inputs such as capital, labour, raw materials etc are utilised. It can measured as (Total Output/Total Inputs).
It can be measured as:
Total factor Productivity: Can be measured as Total output divided by Total inputs (Capital, Labour, Raw Materials etc). Increase in TFP denotes input use efficiency i.e. how efficiently different inputs are utilised.
Labour Productivity: Can be measured as the ratio of output to number of workers. Increase in Labour Productivity denotes enhanced labour use efficiency i.e. how efficiently workers are utilised.
Facts about productivity in India (RBI'S Klem’s Database)
- TFP growth accounted for about 20 per cent of India’s aggregate GDP growth between 2011 to 2019.
- TFP growth rate in India slowed from 1.3 per cent (2000 to 2007) to 1.2 per cent (2011 to 2019). However, it is still higher than the global average of 0.1 percent.
- Average Labour Productivity has increased from 2% in 1990s to 4.5% in 2019.
Factors affecting Total Factor Productivity (TFP):
- Capital Deepening: Increase in investment in fixed capital such as Land, Plants, Machinery etc. For example, replacement of handlooms by power looms in textile industries leads to capital deepening and hence enhanced TFP.
- Quality of Labour in the form of better Education and health outcomes, higher skill sets, better managerial practices etc. For example, higher skill set of the workers in the services sector has led to higher TFP.
- Technological developments through R&D and innovations. For example, introduction of HYV seeds in the agriculture during the Green Revolution led to enhanced TFP.
- Input costs: Higher costs of inputs such as land, labour, capital etc. leads to lower TFP. For example, higher logistics costs reduces TFP of manufacturing sector.
Significance of Productivity
- Vision of $ 5 trillion economy: Increased productivity enables production of more goods and services by efficiently utilising the available inputs. For example, higher TFP of Indian economy is due to higher TFP in the services sector.
- Prevent Middle Income Trap: India moved from a low income to lower middle income country in 2008, and is now attempting to become upper-middle income country. However, unlike other countries such as Argentina and South Africa, India can prevent falling into middle income trap by enhancing TFP.
- Double Farmers' income: As highlighted by Dalwai Panel, doubling farmers' income requires enhanced efficiency in utilisation of inputs such as land, water, labour, seeds etc. This can be done through organising farmers into FPOs, micro-irrigation, mechanisation, HYV seeds etc.
- Boost Manufacturing Competitiveness: The share of Manufacturing sector to India's GDP has remained stagnant (around 17%) since 1991 reforms. Enhanced TFP would competitiveness of MSMEs and enable higher value addition.
- Demographic Transition: The share of working-age population is set to increase only for the next 2 decades. Beyond 2041, there could be fall in working-age population. Increased TFP enables India to enhance labour productivity and continue with high growth phase even beyond 2041.
- Win-Win-Win Situation as higher TFP benefits Industries (in the form of higher profits), workers (in the form of higher wages), Government ( in the form of higher tax collections)
- Ensure Aatma Nirbhar Bharat: Higher TFP enables India to reduce imports, boost domestic manufacturing, attracts investment and get integrated into global value chain.
- Self Sustaining Virtuous Cycle: Increase in Investment, greater adoption of technology, higher skill sets of workers etc. leads to higher TFP and higher GDP growth rate. In turn, higher GDP rate facilitates more investment and higher TFP.
Challenges in improving TFP
- Delay in Implementing Factor Market Reforms:
- Land: Limited success of Land Reforms in Agriculture, Absence of legal framework to facilitate Land Leasing in most of the states, Delay in digitisation of land records, conflict prone and cumbersome land acquisition procedure etc.
- Labour: Archaic, complex and cumbersome labour laws, Delays in notification of new labour codes, Lack of adequate flexibility to employers in hiring workers etc.
- Capital: Higher Dependence on Banking sector, Underdeveloped Bond Market, Limited Private sector investment in PPP etc.Entrepreneurship: Lack of access to adequate capital, Issues related to Taxation such as Angel Tax, Problem of exit due to Chakravyuha challenge of Indian economy etc.
- Lack of adequate investment in Education ( 3% of GDP), Health (1.5% of GDP) has led to poor education and health outcomes.
- Jobless Growth: Increase in labour productivity has led to increase in GDP without commensurate increase in job creation. Hence, there is a need to enhance job creation without affecting labour productivity.
- Decline in Female LFPR from 45% in 1990s to 25% in 2019. As per World Economic Forum, increase in female LFPR to match up to male LFPR (75%) can increase India's GDP size by 27%.
- Domination of Dwarf firms in Manufacturing: MSMEs account for 45% of manufacturing output. However, majority of the MSMEs are dwarf firms which are more than 10 years old but continue to employ less than 100 people.
- Poor Innovation Ecosystem in the form of lower investment in R&D (0.7% of GDP), lower number of Patent filings, delays in issuing Patents etc.
- Higher Logistics cost (10-12% of GDP) as compared to global average of 8-10% increases input cost and reduces TFP.
- Public Poor Quality of Fiscal deficit as Government spends higher share of borrowings on Revenue Expenditure rather than Capital expenditure.
- Higher level of Informalisation reduces TFP due to low adoption of technology, limited use of capital, poor managerial skills etc.