India will have to raise its labour productivity growth to 6.3% to achieve 8% GDP growth, says India Ratings and Research (Ind-Ra). The labour productivity growth in FY19 was 5.2%. Similarly, to attain 9% GDP growth, labour productivity growth will have to be raised to 7.3%. This is 40.4% higher than the level attained in FY19.
Given the growth slowdown, this looks unlikely in the near term but is not an insurmountable task. Such levels of labour productivity growth have been achieved in the past (labour productivity growth FY05-FY08: 8.5%). India’s labour productivity growth, like other nations, came under pressure in the aftermath of the 2008 global financial crisis, especially during FY11-FY15 (5.0%). However, it recovered thereafter and grew at 5.8% during FY16-FY19.
The challenge on the productivity front for India is twofold. First, how to raise the overall labour productivity to a level that delivers the required GDP growth rate, and secondly how to lift the labour productivity in the lagging sectors so that growth is more evenly balanced and sustainable over the medium- to long-term. Sectors such as manufacturing (7.2%), electricity, gas, and water supply (7.7%), transport, storage, and communications (7.4%), and community, social, and personal services (6.2%) contributed significantly to the overall labour productivity during FY00-FY16. The sectors that lagged are construction, agriculture and mining which recorded labour productivity growth of 0.4%, 3.2% and 4.8%, respectively. On the contrary, China maintained a labour productivity of 6.5% and above across all sectors during FY00-FY16.
In FY90, China’s labour productivity per person employed was lower than India’s. However, in FY19, India’s labour productivity per person employed in purchasing power parity terms at USD 2018 prices was USD 20,367 as against China’s USD 34,863. Ind-Ra therefore believes a closer monitoring of the sources of GDP growth is vital. As labour productivity is only one-factor or partial-factor productivity measure explaining GDP growth, decomposing the factor inputs into quantity of labour, quality of labour, information and communication technology (ICT) capital, non-ICT capital and total factor productivity (TFP) provides a better perspective on the sources of GDP growth. Except the total factor productivity (TFP), the contribution of all other factor inputs to GDP has declined during FY16-FY18 from FY11-FY15.
According to Ind-Ra, the quantity of labour along with the non-ICT capital will continue to contribute significantly to the GDP growth due to the demographic composition. But, any decline in the contribution of quality of labour and ICT capital is a matter of concern. While the inability of the workforce to upgrade its skill in line with the technological/business/managerial changes in the Indian economy appears to be the reason for the former, a slowdown in capex lately appears to be the cause for the latter. Investment in ICT capital is critical because, unlike technological advancements which are largely confined to manufacturing, the impact of ICT permeates almost all economic sectors and brings significant gains. This can be seen from the transformation and productivity gains that the wholesale/retail trade or banking sectors have witnessed over the past 15 years.
Productivity related challenges can have an adverse impact on economic expansion, profit growth, and societal welfare in India. Since longer and sustainable productivity growth critically depends on how much businesses invest in innovation, knowledge, and intangible capital, and how committed governments are to structural reforms, Ind-Ra believes it is imperative that structural changes in the factor, product and labour markets are given priority.