Labour productivity is crucially dependent on businesses investing in knowledge and innovation even as the governments bring about structural reforms that enable such investments to bear fruit.

An analysis done by India Ratings and Research of Annual Survey of Industries data on India’s labour productivity growth in the organised manufacturing sector shows a disappointing trend. During the high economic growth phase between 2004 and 2008 (just before the global financial crisis hit), India’s labour productivity grew by over 14 per cent every year. But between financial years of 2011 and 2015, this rate fell to just half of that (7.4 per cent) and continued its deceleration to just 3.7 per cent between financial years of 2016 and 2018.

What is labour productivity and why does it matter?

Broadly speaking, productivity is a measure of the efficiency with which resources, both human and material, are converted into goods and services. Besides land and capital, labour productivity plays a crucial role in deciding the rate of economic growth. Indeed, India Ratings report points out that globally labour productivity growth alone accounted for about two-thirds of the gross domestic product (GDP) growth during FY01-FY10, leaving only one-third to labour/employment growth.

What is holding back India’s labour productivity?

Labour productivity is crucially dependent on businesses investing in knowledge and innovation even as the governments bring about structural reforms that enable such investments to bear fruit. According to Indian Ratings, “a lot needs to be done quickly both on the policy front as well as companies’ level because productivity is the most powerful engine of driving and sustaining manufacturing growth, and making the sector globally competitive”.

What else does the study reveal?

There are two other crucial results from the analysis. One, that between financial years 2001 and 2018, the capital intensity — that is, fixed capital used per worker — in India’s organised manufacturing has been rising.

Two, notwithstanding this rise in capital intensity, the output intensity — that is, the value of output per fixed capital — has actually declined over the same period.

In other words, while more and more capital is being used per unit of labour, it is not yielding commensurate level of output growth.