{"id":185489,"date":"2022-05-20T19:00:43","date_gmt":"2022-05-20T13:30:43","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=185489"},"modified":"2022-05-20T19:05:41","modified_gmt":"2022-05-20T13:35:41","slug":"improving-total-factor-productivity-challenges-and-way-forward","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/improving-total-factor-productivity-challenges-and-way-forward\/","title":{"rendered":"Improving Total Factor Productivity: Challenges and Way Forward &#8211; Explained, pointwise"},"content":{"rendered":"\n<table style=\"width: 100%; border-collapse: collapse; background-color: #f7f2f2;\">\n<tbody>\n<tr>\n<td style=\"width: 100%;\">For\u00a0<strong>7PM Editorial<\/strong>\u00a0Archives click<strong>\u00a0<a href=\"https:\/\/forumias.com\/blog\/7-pm-editorials\/\" target=\"_blank\" rel=\"noopener\">HERE <\/a>\u2192<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<h5>Introduction<\/h5>\n<p><span style=\"font-weight: 400;\">India\u2019s Total Factor Productivity (TFP) growth has seen a moderate decline compared to the global experience, though it remains above that of emerging markets and developing economies. The back-to-back setbacks of the pandemic and the Russia-Ukraine war led to supply chain disruptions which has increased costs of production<\/span><span style=\"font-weight: 400;\">. It is also anticipated that there will be increase of capital outflow from India as the US Federal Reserve is expected to increase the interest rates. <\/span><span style=\"font-weight: 400;\">In such a situation, there is a need to focus on improving the TFP to <\/span><span style=\"font-weight: 400;\">reduce the costs, as well as to attract greater investment.\u00a0<\/span><\/p>\n<table style=\"border-collapse: collapse; width: 100%;\">\n<tbody>\n<tr>\n<td style=\"width: 100%;\"><b>Understanding Key Terms<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Productivity levels measure the relationship between total products or output, and inputs or factors of production employed.<\/span><\/li>\n<li style=\"font-weight: 400;\"><b>Labor productivity<\/b><span style=\"font-weight: 400;\"> is a measure of total output divided by the units of labor employed in the process of production<\/span><\/li>\n<li style=\"font-weight: 400;\"><strong>T<\/strong><b style=\"font-weight: 400;\">otal Factor Productivity<\/b><span style=\"font-weight: 400;\"> is a measure of total output divided by a weighted average of inputs; i.e. labor and capital. It measures the productive efficiency of economy as it measures how much output can be produced from a certain amount of inputs.<\/span><\/li>\n<\/ul>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<div class=\"content-box-blue\">\r\n\t<span style =\"font-size: 20px;\">ForumIAS is now in <span style = \"font-weight:bold; padding:1px; color: #053259 ; \">Hyderabad<\/span>. <a style =\"color: blue\"href=\"https:\/\/forumias.com\/blog\/we-are-coming-to-hyderabad-with-sfg\/\"><b>Click here<\/b><\/a> to know more<\/span>\r\n<\/div>\n<h5>What is the trend of Total Factor Productivity (TFP) growth in India and the World?<\/h5>\n<p><span style=\"font-weight: 400;\">A recent Reserve Bank of India (RBI) report points to a moderate decline in TFP growth compared to the global experience. <\/span><span style=\"font-weight: 400;\">TFP growth rate for India during the<\/span><b> 2010-2019 period was approximately 2.2%<\/b><span style=\"font-weight: 400;\">, as against -0.3% for emerging markets and developing economies. However, as indicated by the graph underneath, the TFP growth has been erratic, having fallen below 0% on multiple occasions.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">During the pandemic, the TFP for India declined by 2.9% in 2020 and marginally improved by 0.1% in 2021. In 2022, TFP growth rate is projected to increase to 2%.\u00a0<\/span><\/p>\n<p><img data-recalc-dims=\"1\" loading=\"lazy\" decoding=\"async\" class=\"aligncenter\" src=\"https:\/\/i0.wp.com\/images.livemint.com\/img\/2022\/05\/16\/original\/primerchart_1652721502642.png?resize=750%2C455&#038;ssl=1\" alt=\"TFP Growth Trend in India and the World Total Factor Productivity UPSC\" width=\"750\" height=\"455\" \/><\/p>\n<p style=\"text-align: center;\"><em><span style=\"font-weight: 400;\">Source: Live Mint<\/span><\/em><\/p>\n<p><span style=\"font-weight: 400;\">Global productivity growth has witnessed a prolonged slowdown since 2010, with the deceleration sharper in emerging and developing economies.\u00a0<\/span><span style=\"font-weight: 400;\">This is ascribed to a weakening investment climate, and lower employment growth levels in developed economies, among others. TFP growth for the world economy was <\/span><b>0.7% in 2021<\/b><span style=\"font-weight: 400;\"> and may shrink by 0.5% in 2022.<\/span><\/p>\n<h5>What are the Structural Determinants of TFP Growth in India?<\/h5>\n<p><span style=\"font-weight: 400;\">According to an RBI Report, Total Factor Productivity (TFP) growth can be explained through the sensitivity of the economy to<\/span><b> four factors<\/b><span style=\"font-weight: 400;\">:\u00a0<\/span><\/p>\n<p><b>Capital deepening:<\/b><span style=\"font-weight: 400;\"> It is represented by growth in the stock of fixed capital. Fixed capital are <strong>assets used in the productive process<\/strong>. These include Property, Plants, and Equipment. Increase in fixed capital enhances productive capacity of the economy. <\/span><span style=\"font-weight: 400;\">Greater the investments in fixed capital, greater the increase in stock, and consequently higher the increase in productivity.<\/span><\/p>\n<p><b>Capital composition:<\/b><span style=\"font-weight: 400;\">\u00a0It is represented by the average <strong>rental price of capital<\/strong> across 3 major types viz. construction, machinery and transport equipment. Capital composition has a negative relationship with TFP growth. <\/span><span style=\"font-weight: 400;\">An increase in cost of capital, such as machinery, without any significant improvement in its productive capabilities <\/span><b>may restrict firms from expanding its scale of operations<\/b><span style=\"font-weight: 400;\"> and technological upgradation, limiting its TFP growth. (Firms may not be ready to invest if the cost of capital is high. Lack of investments keep the scale low, and scale economies may not be realized.)<\/span><\/p>\n<p><b>Labour quality:<\/b><span style=\"font-weight: 400;\"> It is represented by an index of the composition of the labour force under five broad education categories (below primary, primary, middle, secondary &amp; higher secondary and above higher secondary) weighted by their average annual earnings. It is expected the higher the education levels, higher the skills of labor. A high proportion of educated, skilled labour will enhance the TFP<\/span><span style=\"font-weight: 400;\">.<\/span><\/p>\n<p><b>Input use intensity:<\/b><span style=\"font-weight: 400;\">\u00a0<\/span><span style=\"font-weight: 400;\">It is measured by the input growth. It also shows a positive association with TFP growth.<\/span><\/p>\n<h5>What is the need to enhance the TFP?<\/h5>\n<p><b>Optimum Utilization of Resources<\/b><span style=\"font-weight: 400;\">: Improvements in TFP shows a country is able to extract the best out of its factor inputs that results in maximization of output with minimum input i.e., less resources are used to get more output. This also enhances sustainability and reduces pressure on resource base.<\/span><\/p>\n<p><b>Attracts Investment:<\/b><span style=\"font-weight: 400;\"> TFP growth reduces the cost of production. It allows a country to attract domestic as well as foreign private investment towards it.\u00a0\u00a0<\/span><\/p>\n<p><b>Improves Standard of Living:<\/b><span style=\"font-weight: 400;\"> Improved TFP minimizes per-unit cost facilitating the horizontal expansion of consumption demand, thereby improving the standard of living.<\/span><\/p>\n<p><b>Contribution to GDP<\/b><span style=\"font-weight: 400;\">: It plays a pivotal role in determining economic growth of a nation. Growth can happen by increasing resource inputs or by enhancing productivity. <\/span><span style=\"font-weight: 400;\">According to RBI estimates, TFP growth contributed to 30% of India\u2019s GDP growth during 2010-2018.\u00a0<\/span><\/p>\n<h5>What steps have been taken to improve productivity in India?<\/h5>\n<p><b>Skilling initiatives<\/b><span style=\"font-weight: 400;\">: The Government has launched many initiatives to upskill the population which include the National Apprenticeship Training scheme, PM Kaushal Vikas Yojana etc.\u00a0<\/span><\/p>\n<p><b>New Education Policy, 2020: <\/b><span style=\"font-weight: 400;\">NEP, 2020 lays emphasis on reforms in education at all levels from pre primary to higher education. It aims to bring transformation in the education system of India in line with contemporary needs.\u00a0<\/span><\/p>\n<p><b>Labour Codes<\/b><span style=\"font-weight: 400;\">: In 2019, the Ministry of Labour introduced four labour bills to consolidate the existing 29 labour laws. These bills relate to (1) industrial relations; (2) minimum wages; (3) social security; and (4) occupational safety, health and working conditions. The labor code will address the structural impediments in India&#8217;s labor market and improve labor productivity.<\/span><\/p>\n<p><strong>Infrastructure<\/strong>: Union Budget 2022-23 has an increased outlay for creating public infrastructure. PM Gati Shakti has been launched to streamline the process of infrastructure creation. This will remove infrastructure bottlenecks and improve productivity of the economy.<\/p>\n<table style=\"border-collapse: collapse; width: 100%;\">\n<tbody>\n<tr>\n<td style=\"width: 100%;\"><strong>Read More<\/strong>: <a href=\"https:\/\/forumias.com\/blog\/pm-gati-shakti-national-infrastructure-master-plan\/\" target=\"_blank\" rel=\"noopener\">PM Gati Shakti \u2013 National Infrastructure Master Plan \u2013 Explained, pointwise<\/a><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><strong>PLI Schemes<\/strong>: The Government has also launched PLI Schemes have the potential to create an additional production of Rs. 30 lakh crore. Incentives under PLI are expected to bring in foreign investment and technology which will boost productivity. Union Budget 2022-23 plans to create 60 lakh new jobs under the PLI schemes in 14 sectors.<\/p>\n<table style=\"border-collapse: collapse; width: 100%;\">\n<tbody>\n<tr>\n<td style=\"width: 100%;\"><strong>Read More<\/strong>: <a href=\"https:\/\/forumias.com\/blog\/production-linked-incentive-or-pli-scheme-and-its-challenges-explained-pointwise\/\" target=\"_blank\" rel=\"noopener\">Production-Linked Incentive or PLI Schemes and its challenges \u2013 Explained, pointwise<\/a><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<h5>What are the challenges in improving TFP in India?<\/h5>\n<p><b>Insufficient Allocation<\/b><span style=\"font-weight: 400;\">: Various experts, committees and reports have recommended that India should allocate 6% and 2.5% of GDP to education and health respectively. However, actual allocation has been much lower.<\/span><\/p>\n<p><b>Underutilization of Land<\/b><span style=\"font-weight: 400;\">: Agriculture has a disproportionately high share in land available for use in economic activity, despite being the least productive. Further, the 2013 Land Acquisition Act has been questioned by several stakeholders, stating that it may stall land acquisition by making the cost of land prohibitive for industry and the procedures more cumbersome.<\/span><\/p>\n<p><b>Red Tapism and Corruption<\/b><span style=\"font-weight: 400;\">: Excessive paperwork and corruption creates delays and push up the total cost of projects thereby reducing productivity.\u00a0<\/span><span style=\"font-weight: 400;\">According to the Ministry of Statistics and Programme Implementation data, the number of stalled projects has increased sharply since 2018 for projects above INR 150 crore of investment. The average cost overrun per project shows an increasing trend, touching a high of 31% of the original cost in 2020 .<\/span><\/p>\n<p><b>Labour Issues<\/b><span style=\"font-weight: 400;\">: India has one of the lowest Labour Force Participation Rate (LFPR) among the major economies, partly due to <\/span><b>very low female LFPR (22%)<\/b><span style=\"font-weight: 400;\"> (WDI, World Bank), especially among poorer states. <\/span><span style=\"font-weight: 400;\">Further, there is a prevalence of <\/span><b>high informal employment<\/b><span style=\"font-weight: 400;\"> under which workers work on meagre wages with little or no social security. <\/span><span style=\"font-weight: 400;\">Similarly, 28% of the population is illiterate and another 26% have received only primary school education (PLFS, 2019-20). Only 9% of the population possesses a graduate\/post graduate degree in India.<\/span><\/p>\n<h5>What steps should be taken going forward?<\/h5>\n<p><b>First<\/b><span style=\"font-weight: 400;\">, there is a need to focus on<\/span><b> boosting innovation and research<\/b><span style=\"font-weight: 400;\">. Though India\u2019s ranking in the Global Innovation Index, 2021 has improved to 46, investment in R&amp;D has remained low (&lt;0.7% of GDP). This must be enhanced.<\/span><\/p>\n<p><b>Second<\/b><span style=\"font-weight: 400;\">, employers are acknowledging the fact that manpower is an essential component in profit earnings and have shifted their focus on <\/span><b>retaining talent<\/b><span style=\"font-weight: 400;\">. This positive transformation seen after the pandemic needs to be extended further.<\/span><\/p>\n<p><b>Third<\/b><span style=\"font-weight: 400;\">, to combat the issue of underutilization of land, the <\/span><b>states should formulate their respective laws to ease the acquisition process<\/b><span style=\"font-weight: 400;\">. Gujarat, Rajasthan, Maharashtra, Jharkhand, and Telangana have already enacted new laws. Further, for parity and distributional justice, there is a need to explore avenues for<\/span><b> land pooling<\/b><span style=\"font-weight: 400;\">.<\/span><\/p>\n<p><b>Fourth<\/b><span style=\"font-weight: 400;\">, focus should be on <\/span><b>raising the quality of labour<\/b><span style=\"font-weight: 400;\"> through large scale expansion of public expenditure on education, health and the skilling.<\/span><\/p>\n<h5>Conclusion<\/h5>\n<p><span style=\"font-weight: 400;\">In a nutshell, it can be said that quality education, better healthcare, nurturing of innovation, introduction of efficient technology and processes in domestic companies and reduction in misallocation of resources can help improve TFP levels in India.<\/span><\/p>\n<p>Source: <a href=\"https:\/\/www.livemint.com\/industry\/manufacturing\/why-india-needs-to-improve-its-productivity-11652720882028.html\" target=\"_blank\" rel=\"noopener\">Mint<\/a>, <a href=\"https:\/\/rbi.org.in\/Scripts\/PublicationsView.aspx?id=21037\" target=\"_blank\" rel=\"noopener\">RBI<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>For\u00a07PM Editorial\u00a0Archives click\u00a0HERE \u2192 Introduction India\u2019s Total Factor Productivity (TFP) growth has seen a moderate decline compared to the global experience, though it remains above that of emerging markets and developing economies. The back-to-back setbacks of the pandemic and the Russia-Ukraine war led to supply chain disruptions which has increased costs of production. It is&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/improving-total-factor-productivity-challenges-and-way-forward\/\">Continue reading <span class=\"screen-reader-text\">Improving Total Factor Productivity: Challenges and Way Forward &#8211; Explained, pointwise<\/span><\/a><\/p>\n","protected":false},"author":10322,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[130,9],"tags":[],"class_list":["post-185489","post","type-post","status-publish","format-standard","hentry","category-7-pm","category-public","entry"],"jetpack_featured_media_url":"","views":{"total":68,"cached_at":"","cached_date":1700118566},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/185489","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10322"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=185489"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/185489\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=185489"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=185489"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=185489"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}