- Intro – mention about the trends of TFP in India.
- Delineate the structural factors.
An RBI report points to a moderate decline in Total Factor Productivity (TFP) 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 & developing economies. However, the TFP growth has been erratic, having fallen below 0% on multiple occasions. 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%.
Structural factors affecting TFP in India:
According to an RBI Report, Total Factor Productivity (TFP) growth can be explained through the sensitivity of four factors :
- Capital deepening: It is represented by growth in the stock of fixed capital. Fixed capital are assets used in the productive process. These include Property, Plants, and Equipment. Increase in fixed capital enhances productive capacity of the economy. Greater the investments in fixed capital, greater the increase in stock, and consequently higher the increase in productivity.
- Capital composition: It is represented by the average rental price of capital across 3 major types viz. construction, machinery and transport equipment. Capital composition has a negative relationship with TFP growth.
- An increase in cost of capital, such as machinery, without any significant improvement in its productive capabilities may restrict firms from expanding its scale of operations and technological upgradation, limiting its TFP growth.
- Labour quality: It is represented by an index of the composition of the labour force under five broad education categories (below primary, primary, middle, secondary & higher secondary and above higher secondary) weighted by their average annual earnings. It is expected the higher the education levels, higher the skills of labour. A high proportion of educated, skilled labour will enhance the TFP.
- Input use intensity: It is measured by the input growth. It also shows a positive association with TFP growth.
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.