Declining labour productivity challenging; India needs skill enhancement
India Ratings and Research (Ind-Ra) says that India’s declining labour productivity is adversely impacting its GDP growth. India’s labour productivity grew at an average annual rate of 5.52% during the decade of 2000s as against 3.05% during 1990s.
In fact, during the high growth phase of FY05-FY08, it grew at 9.0%. However, India is now facing a productivity imperative with average labour productivity falling to 3.84% during FY11-FY15.
Given that the long-term average annual increase of labour force in India is 1.7%, India will have to raise its labour productivity growth to 7.3% (73.8% yoy) to attain the GDP growth of 9.0%. Also, to attain the double-digit growth of 10%, the labour productivity growth will have to be nearly doubled to 8.3%.
India’s labour productivity growth was 4.2% in FY15. Ind-Ra believes this is surmountable as India has attained such levels of labour productivity growth in the past. A higher labour productivity does not mean lower employment.
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. Also, labour productivity is not uniform across various sectors.
The sectors that stand out and achieved higher labour productivity growth during FY00-FY13 were (i) electricity, gas, and water supply (8%), (ii) transport, storage, and communications (7.0%), (iii) manufacturing (6.4%), and (iv) community, social, and personal services (6.0%).
Construction, agriculture and mining recorded labour productivity growth of negative 1.0%, 2.4% and 4.7%, respectively. Stagnation/low agricultural productivity has become a major cause of food inflation over the past few years. Similarly, the construction sector, which has been absorbing the large number of workers released from agriculture, is plagued with several issues which include the slow adoption of new technology and unorganised nature of its operations.
In FY90, China’s labour productivity per person employed was lower than India’s. However, in FY15, India’s labour productivity per person employed was USD13,637 as against China’s USD23,089. Skilling the workface therefore is an imperative for India.
According to National Policy on Skill Development and Entrepreneurship (NPSDE) 2005 the number of fresh entrants into the workforce requiring skill/vocational training during 2015-22 has been estimated to be 104.62 million.
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.
Structural changes to factor, product and labour markets are the most critical component of enhancing productivity and competitiveness in the long-term.
Ind-Ra, therefore, believes 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.
By: Sunil Kumar Sinha, Principal Economist & Director Public Finance, India Ratings & Research – A Fitch Group Company