The country must work at raising productivity growth

Source– The post is based on the article “The country must work at raising productivity growth” published in the mint on 2nd March 2023.

Syllabus: GS3- Indian economy and growth

Relevance: Factors impacting growth of Indian economy

News- The recent budgets have hiked capital expenditure substantially but there is less focus on improving productivity of the economy.

What is the rationale behind substantially hiked capital expenditure in recent budgets?

The reason is multiplier effects of capex. It is assumed that increased capex would lead to higher growth in future, as these investments could enhance capital formation.

Prospects of higher growth might also attract more private investments.

However, such a growth strategy fails to realise its full potential unless there is corresponding increases in productivity.

Why is productivity an issue for the Indian economy?

A recent study published in January’s RBI Bulletin shows the existence of large productivity differences across sectors.

The study examined the time span between 2001 and 2019 and divided it into two sub-periods, 2001-10 and 2011-19.

RBI study offers disaggregated economy-wide estimates in the manufacturing sector. Wide variations are found in productivity growth across sectors.

The sectors crucial in accelerating industrial growth, such as electrical equipment, refined petroleum, machinery and chemicals, witnessed a productivity decline in the second time period, compared to the first.

The sectors with lower share in overall value addition, such recycling, have registered higher productivity growth since 2010.

Two important inferences can be made from the figures. First, capital-intensive sectors saw a decline in productivity growth. Labour-intensive sectors, barring transport equipment and parts had higher productivity.

The RBI study’s findings are in line with a 2021 World Bank report. It observed that the level of productivity in the South Asia Region(SAR)  remains the lowest among emerging market and developing Economies regions.

The World Bank report argues that the average level of labour productivity in SAR during 2013-18 was only 5% of the advanced economy average.

However, it should be noted that within South Asia, India stands out with higher growth of productivity.

What is the way forward to increase the productivity of the Indian economy?

There is a need to enhance investments to strengthen human capital. The economy has already achieved outcomes in terms of raising life expectancy, reducing mortality, and expanding access to education.

The investments in physical infrastructure needs to be complemented with commensurate human capital improvements.

This involves a two-pronged approach. First, provide more capital access to factors that contribute to human capital formation and ensure that these are inclusive. Second, we must ensure continuous quality improvements in human capital.

Resource reallocation was the driver of aggregate productivity during 2001-10. Productivity can be raised by sectoral reallocation of resources from low to more productive sectors. It should be accompanied by improved local services and urban planning.

There is a need for renewed effort to promote the reallocation of capital and labour to more productive firms within sectors.

Productivity-enhancing inter-firm resource reallocation can be encouraged by policies to foster competition and by reducing regulatory burdens that discourage firm growth. This requires continued reforms.