Productivity Slowdown!

The slowdown of productivity growth is quite noticeable in the current national as well as the international scenario. While it may seem that it is a relatively new problem, something that has only been occurring in the past couple of years, the truth is that it has been a problem in the making. There has been a considerable decline in Labor Productivity growth over the past few decades now.

Low Labor Productivity: The overall productivity of a certain nation or state is measured using something known as Labor Productivity. It determines productivity by calculating the economic output of the area per labor hour. The growth or decline in labor productivity is calculated by the change in output per hour over the course of a definite period of time. Determining the labor productivity of an area is directly linked to its living standards by comparing production and consumption.

Ever since 2010, the world has been in a prolonged period of slowdown, which by definition means a period that comes after a period of faster and accelerated growth. Although in 2020, at the start of the Covid-19 pandemic, labor productivity saw a spike and increased by 4.5% globally, it was a glimmer of hope for economies that had been affected by the slowdown. However, by the time 2022 came around productivity growth stalled again. Two of the potential reasons for this are possibly the Russia-Ukraine war and the remanent effects of the pandemic.

This means that to some extent productivity all across the world has been decreasing. There are a few factors that contribute to this decline including poor investments and low employment growth.

India’s productivity is on a decline: A growth in productivity levels has helped many nations around the world to boost their economy and rank at the top. Unfortunately, India has not seen these high growth levels, leading to stagnancy in economic growth. Back in the mid-18th century, India was at par with the likes of the US, UK, China, Japan, etc in terms of their GDP. However, after the three industrial revolutions, India has been relegated to the bottom.

One of the main reasons for this decline is the fact that India’s total factor productivity (TFP) levels have been quite low. Compared to the world, India’s total factor productivity growth has seen a major decline, although it still is above most developing and emerging economies. Growth in the economy is a result of an increase in labor and capital. Ideally, the more the working population in the nation, the more capital gets collected, and the more the GDP is. However, a high GDP can only be sustained if TFP is increased. TFP is measured by subtracting the rate of labor and capital input from the rate of output and it can only be increased if there is the efficiency of labor and capital is improved. In the years between 1990-2015, the TFP in India accounted for only about 24% of the total GDP, whereas other higher economies all had much greater numbers, for example, 52% for China, 64% in Latvia, and so on.

The productivity growth in India might be slacking as it falls short behind its peers on two major fronts: industrial upgrades and human capital investments. One example is that India invested 0.6% of its GDP into research and development and has only 253 researchers per million people, while China invested 1.4% and has over 1050 researchers per million. Another one is the rate of robot installation, India is estimated to install a little more than 4000 units annually, compared to almost 1.5 lakh in China.

Need to shift to high-productivity jobs: For the Indian productivity levels to improve, it is vital that the employment structure in the country undergo a major transformation. Firstly, informal employment in India needs to be reduced, as it proves to be a major hindrance in sustaining growth. Additionally, there needs to be a shift from low-productivity and low-wage sectors such as agriculture where productivity is only 37%, and move to high-productivity ones such as financial and professional sectors. Targeted job creation in these sectors is key to improving productivity levels. Moreover, private firms should take up responsibility for imparting vocational training and up-skilling their employees, which will result in high returns.

Final thoughts: The steps that the country has been taking toward skill development and education will prove to be a big asset as they exponentially increase employability. Factors such as better education, healthcare, technology, etc, are key to improving the TFP of India. This will eventually result in a higher standard of living.