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Approach:

  1. Define TFP and state the current trend.
  2. Discuss the challenges.
  3. State the measures taken by govt to improve TFP.

Total Factor Productivity is a measure of total output divided by a weighted average of inputs; i.e. labour and capital. It measures the productive efficiency of economy as it measures how much output can be produced from a certain amount of inputs. TFP depends upon capital deepening, capital composition, labour quality & input use intensity.

A recent Reserve Bank of India (RBI) report points to a moderate decline in Total Factor Productivity growth compared to the global experience. TFP growth rate for India during the 2010-2019 period was approximately 2.2%, as against -0.3% for emerging markets and developing economies. 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%.

Challenges:

  • Insufficient Allocation: 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.
  • Underutilization of Land: 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.
  • Red Tapism and Corruption: Excessive paperwork and corruption creates delays and push up the total cost of projects thereby reducing productivity. 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.
  • Labour Issues: India has one of the lowest Labour Force Participation Rate (LFPR) among the major economies, partly due to very low female LFPR (22%) (WDI, World Bank), especially among poorer states. Further, there is a prevalence of high informal employment under which workers work on meagre wages with little or no social security. 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.

Steps taken to improve productivity:

  • Skilling initiatives: The Government has launched many initiatives to upskill the population which include the National Apprenticeship Training scheme, PM Kaushal Vikas Yojana etc.
  • New Education Policy, 2020: 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.
  • Labour Codes: In 2019, the Ministry of Labour introduced four labour bills to consolidate the existing 29 labour laws.
  • Infrastructure: 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.
  • PLI Schemes: 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.
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