4 min read.Updated: 11 Jun 2018, 03:16 AM ISTLivemint
Labour productivity growth rates must increase to boost India's GDP growth and living standards
The French take their leisure time seriously. This, after all, is the country that ushered in 2017 with a law barring work email after hours. Little wonder Parisians punch into work for an average of just a little over 1,600 hours annually. Indians are an altogether more industrious lot, according to Swiss bank UBS’ Price And Earnings Report 2018. Mumbaikars clock in at 3,315 hours a year—the most among the 77 cities around the world surveyed—while New Delhi comes in fourth. The problem: French labour productivity is among the highest in the world. Indian labour productivity is emphatically not.
Economies are somewhat like Tolstoy’s unhappy families: Each is affected by unique factors. That said, it is possible to draw some broad conclusions about the links between labour productivity and economic growth. Citi GPS’ Securing India’s Growth Over the Next Decade report has analysed data from 1950 onwards for 26 economies, developed and developing. It has found that in 75% of the cases, gross domestic product growth exceeded 8% when labour productivity growth topped 6%. This was as true of post-war Japan as it was of Deng Xiaoping’s China.
India’s peak years have come much later. Between 1950 and 1980, labour productivity growth averaged a meagre 1.7%. The two decades to the turn of the millennium saw that average more than double to 3.8%. This was the period when India’s manufacturing and services sectors took off, leaching labour from the lower productivity agricultural sector. Labour productivity growth peaked at 10.2% in 2010 and has been on the decline since, making India part of the global productivity slowdown enigma. In 2016, it stood at 4.75%. This does not bode well for achieving the growth targets that are needed to raise living standards.
A number of factors are relevant here. First, low labour productivity implies misallocation of labour. The shift away from agriculture should mean that this isn’t a problem in India. But efficient allocation doesn’t work quite so neatly. Economists Margaret S. McMillan and Dani Rodrik pointed out in a 2011 paper, Globalization, Structural Change And Productivity Growth, that as firms increase in efficiency, they have reduced need for labour. Workers are then compelled to move to more low productivity employment. After the Jawaharlal Nehru years, growth in India until 1980 was labour intensive; it has been capital intensive since. And as Tadit Kundu has pointed out in Mint (goo.gl/M1ePi3), capital-intensive sectors such as metal products and chemicals have been responsible for the bulk of productivity growth while labour-intensive sectors such as leather and textiles have lagged behind. This adds to the inequality problem. It also places India at risk of the phenomenon McMillan and Rodrik identified.
This feeds into the second problem: India’s economy consists largely of small firms, a large segment of them in the unorganized sector. This creates several hurdles to productivity and economic growth. Enterprises are unable to invest in the machinery needed to boost labour productivity due to a lack of access to capital. They are also unable to invest in worker skilling. The low productivity and output consequently result in poor wages.
This problem of scale points to the third problem: innovation. It is a central point of the global productivity slowdown debate. Is the slowdown at least partly due to innovation today not being as transformative as it was during the previous century, as Robert Gordon holds? Or is it because, as Erik Brynjolfsson has argued, innovation is every bit as transformative now but still in its infancy?
Evidence from Organisation for Economic Co-operation and Development member states points to innovation and its productivity-boosting effects being as robust as ever—but limited to “frontier firms". These companies are typically larger and younger. Technological diffusion to the rest of the economy tends to be uneven and slow. The preponderance of small enterprises in the Indian economic landscape thus works against the introduction, use and spread of labour productivity-boosting innovation.
The solutions to these problems—and myriad linked issues—are neither easy nor quick. The goods and services tax is an important step toward formalization of the economy, but the resultant productivity boosts will take years to gestate. Meanwhile, labour law reforms are still pending. In their absence, formal enterprises lean on contractual workers. This robs them of efficiency gains and the economy of the benefits of a productivity boost. Little wonder India’s automobile industry—one of the flag-bearers of the post-1980 manufacturing surge—still suffers from a substantial productivity gap that reverberates down the supply chain to smaller enterprises. And while the government’s skilling efforts at least acknowledge a serious labour capital problem, their failure thus far points to the importance of organic, private sector efforts that are difficult to come by in an economy as structurally lopsided as India’s.
When the French government moved to make changes to France’s 35-hour work week in 2016, there were widespread protests and marches. The stakes—and consequences—for India are considerably higher. International Monetary Fund chief Christine Lagarde has warned of the financial and social instability that slow productivity growth could cause. Indians might work more than their global peers—but the government must focus on enabling them to work better.
Can India buck the global productivity slowdown trend? Tell us at firstname.lastname@example.org
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