Friday, February 12, 2016

India would need to double falling labour productivity to reach 9% GDP growth: An "unlikely" proposition

Per person labour productivity in US$ (2014 prices)
By Our Representative
India Ratings and Research (Ind-Ra), an associate of the New York-based Fitch Group, has suggested that India’s Gross National Product (GDP) growth is unlikely to grow by 9%, as predicted by the Government of India, because labour productivity of late has been progressively going down, with no signs of improvement.
Indicating that there is a direct link between GDP growth and labour productivity, Ind-Ra says, “India will have to raise its labour productivity growth to 7.3% (73.8% year on year) to attain the GDP growth of 9.0%.”
As against the required growth of 7.3%, the rating agency has said in a research paper, titled “Skill India to Improve Labout Productivity", “India’s labour productivity grew 4.2% in FY15, and to attain the double-digit growth of 10%, labour productivity growth will have to be nearly doubled to 8.3%.”
Pointing towards how “labour productivity has fallen lately”, the paper says, “India’s labour productivity grew at an average annual rate of 5.52% during the decade of 2000s as against 3.05% during 1990s.”
Pointing towards the fall in labour productivity, the paper says, “The labour productivity picked up, In fact, during the high growth phase of FY05-FY08, it grew at 9.00%.” Thereafter, India has been “facing a productivity imperative with average labour productivity falling to 3.84% during FY11-FY15.”
Per person labour productivity in US$ (2014 prices)

Sector-wise breakup

Giving sector-wise breakup labour productivity growth during FY00-FY13, Ind-Ra says, for electricity, gas, and water supply it was 8%, for transport, storage, and communications 7%, for manufacturing 6.4%, and community, social, and personal services 6.
Pointing out that “construction, agriculture and mining recorded labour productivity growth of negative 1.0%, 2.4% and 4.7%, respectively”, Ind-Ra says, compared to India, “China maintained labour productivity growth in the range of 6.6%-8.4% during FY00- FY13 across various sectors, which is both higher and more uniform across the sectors.”
In value terms, Ind-Ra says, China’s labour productivity was double that of India in FY 2015. “In FY15, India’s labour productivity per person employed was USD13,637 as against China’s USD23,089”, it points out.
The rating firm believes, even the financial year FY2016 there would be a “continuation of the low labour productivity trends, posing concern for economic growth, market expansion, profit growth, and societal welfare.”
It adds, “Longer and sustainable labour productivity growth critically depends on how much businesses invest in innovation, knowledge, and intangible capital, and how committed governments are to structural reforms.”
Insisting that the Modi government go in for structural reforms urgently, the paper says, “Sooner the policy issues relating to land acquisition, goods and services tax and labour market reform are settled, the better it is for economic growth.”
The paper says, “Much of India’s productivity gains during 2000s did not come from a shift of workers from the lower-productivity agriculture to other sectors, but from productivity gains within the sectors.”
For example, it says, “While the share of manufacturing sector in the total employment remained nearly unchanged between FY94-FY10, the sector’s labour productivity went up from negative 1.4% during 1990s to 6.4% for FY00-FY13.”
Dispelling the view that higher labour productivity would mean lower employment, the paper says, “An additional 63.4 million jobs (labour productivity growth: 5.29%) were created between FY00-FY10 compared to 22.3 million jobs (3.84%) between FY94-FY00.”
It adds, “The share of jobs in agriculture in national employment declined by 7% between FY00-FY10 and construction sector largely filled the gap.”

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