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Why India needs to improve its productivity

TFP growth rate for India during the 2010-2019 period was approximately 2.2%, as against -0.3% for emerging markets and developing economiesPremium
TFP growth rate for India during the 2010-2019 period was approximately 2.2%, as against -0.3% for emerging markets and developing economies

India’s total factor productivity (TFP) growth has seen a moderate decline compared to the global experience, though it remains above that of emerging markets and developing economies, according to a recent report. Mint examines what it means for the economy.

India’s total factor productivity (TFP) growth has seen a moderate decline compared to the global experience, though it remains above that of emerging markets and developing economies, according to a recent report. Mint examines what it means for the economy.

What does TFP measure?

Productivity levels measure the relationship between total products or output, and inputs or factors of production employed. Labour productivity is a measure of total output divided by the units of labour employed in the process of production, while total factor productivity is a measure of total output divided by a weighted average of inputs; i.e., labour and capital. Improvements in TFP bring down production costs, raise output levels, and lead to a higher gross domestic product. While total productivity measures all-inclusive productivity, TFP is a measure of production efficiency.

How has India fared thus far?

A recent Reserve Bank of India (RBI) report points to a moderate decline in 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 and developing economies. 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%. As per estimates, TFP growth contributed to 30% of India’s GDP growth during 2010-2018. It was largely driven by public administration, quality education and social works.

Mixed results
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Mixed results

What has been the TFP trend across the world?

Global productivity growth has witnessed a prolonged slowdown since 2010, with the deceleration sharper in emerging and developing economies. This is ascribed to a weakening investment climate, and lower employment growth levels in developed economies, among others. TFP growth for the world economy was 0.7% in 2021 and may shrink by 0.5% in 2022.

What are the ways to improve TFP

India’s initiatives around skill development and the new education policy are steps in the right direction, since they focus on boosting manpower employability. 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. Though the country’s ranking in the Global Innovation Index, 2021 has improved to 46, it still has some distance to go.

How can the industry improve productivity?

Improved TFP minimizes per-unit cost facilitating the horizontal expansion of consumption demand, thereby improving the standard of living. Employers have fortunately started acknowledging the fact that manpower is an essential component in profit earnings. Today, the focus has shifted to retaining talent, which is limited in supply. This positive transformation seen after the pandemic needs to be further extended.

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH

 

 

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