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Need To Work On Raising Productivity Growth

Context:

Capital investment outlay for the year 2023-24 is being increased steeply by 33% to Rs 10 lakh crore. This will be 3.3% of GDP and it is almost three times the outlay made in 2019.

Relevance:

GS II: Indian Constitution, GS III: Growth & Development, Planning, Government Budgeting, Inclusive Growth, Government Policies & Interventions,

Dimensions of the Article:

  1. Impact of increase in the Capital Expenditure
  2. Analysis of the recent study on productivity
  3. Challenge that India must address
  4. Significance of Human Capital in increasing productivity growth
  5. Way Forward

Impact of increase in the Capital Expenditure:

  • Recent budgets have hiked capital expenditure substantially.
  • An increased capital expenditure outlays would lead to higher growth in future.
  • These investments could enhance capital formation, thereby boosting a major factor of production.
  • Despite the gestation gaps that can exist in realising this growth through public investments, prospects of higher growth ahead might also attract more private investments.
  • However, such an investment-driven growth strategy would fail to realize its full potential unless it is accompanied by corresponding increases in productivity.

Analysis of the recent study on productivity:

  • As per the recent study published by the RBI, there are large productivity differences across sectors.
  • In recent years, India’s manufacturing sector has been the focus of policy attention. Hence there is need to focus on the trends of productivity in this sector.
  • The study pointed out that in the last decade-
    • Decline in productivity growth of capital-intensive sectors: Those which could be crucial in accelerating industrial growth, such as electrical equipment, refined petroleum, machinery and chemicals, witnessed a productivity decline.
    • Higher growth in labour-intensive sectors: Those with a lower share in overall value addition, such recycling, have registered higher productivity growth since 2010.
    • Analysis on Aggregate productivity:
      • The datareveals remarkable differences in the structure of sources of aggregate total-factor-productivity growth in the two sub-periods.
      • Resource reallocation was the driver of aggregate productivity during 2001-10, with labour and capital reallocation accounting for 82% of aggregate productivity growth, while for 2011-19, it accounted for only 42%.
      • This implies that the latter sub-period was a story of within-industry productivity gains.
  • The RBI study’s findings are in line with a 2021 World Bank report which observed that “the level of productivity in SAR [South Asia Region which includes India] remains the lowest among EMDE [emerging market and developing economies] regions, in part reflecting widespread informal economic activity and struggling manufacturing sectors.”
  • World Bank Report:
    • The report argues thatdespite strong productivity growth over the past three decades, the average level of labour productivity in SAR during 2013-18 was still only 5 percent of the advanced economy average and the median productivity level of the industrial sector in SAR was less than two-thirds of the EMDE median in 2017.
    • However, within South Asia, India stands out with higher growth of productivity.

Challenge that India must address:

  • Increase in productivity growth has potential to enhance global competitiveness.
  • The above report raises questions on capital productivity and the nature of technological change.
  • The sectors with the potential to enhance exports, other than textiles, have not been able to register higher productivity.
  • A thorough analysis of the study points out that the sectors with the potential to enhance exports to export growth could be limited even in the years to come.

Significance of Human Capital in increasing productivity growth:

  • Although India has been increasing outlays on physical infrastructure, its trends in productivity growth highlight the need to enhance investments to strengthen human capital.
  • Though India has achieved significant progress in terms of raising life expectancy, reducing mortality, and expanding access to education, there exists significant potential for human capital development.
  • A better-educated and healthier workforce can access improved and more stable jobs, and be more productive.
  • Hence, investments in physical infrastructure needs to be complemented with commensurate outlays in human capital improvements.
  • What are the approaches to be adopted?
    • Providing access to factors that contribute to human capital formation and ensure that these are inclusive.
    • Ensuring continuous quality improvements in human capital.

Way Forward:

  • Productivity gains from sectoral reallocation of resources from low to more productive sectors can be increased if accompanied by improved local services and urban planning.
  • Hence, the policy challenge ahead must focus on enhancing the momentum of resource reallocation.
  • There is a need for renewed effort to promote the reallocation of capital and labour to more productive firms within sectors.  This can significantly increase the gains.
  • Productivity-enhancing inter-firm resource reallocation can be encouraged by policies to foster competition and by reducing regulatory burdens that discourage firm growth.
  • However, all the above measures require continued reforms.

March 2024
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