There are many things that have changed in India?s economic landscape in the two-and-a-half decades of accelerated GDP growth. One major change is the increased amount of capital that is now available for production per unit of labour employed. The growth in the labour force is well below 4% per year. At an investment rate of 30% of GDP, the rise in capital stock is about 10% per year, leading to a substantial rise in capital per unit of labour. Although labour in all sectors may not be working with more capital than before, chances are that this is the case in many sectors.
We need more capital per worker so that there is more output per worker, and there is also more income for workers. Accumulation of capital has been a target of all development efforts. Although there was much divided opinion on who should make the investments and where they should be made, more savings to achieve ever-higher rates of investment was a clear objective of the various Five-year Plans. At an investment rate of 15% of GDP, the accumulation of capital per unit of worker was barely perceptible.
At double the rate of investment, the impact on labour productivity should be far more perceptible. What is different about the economy is also that investment decisions are now more widely diffused than before. Public sector investments are important in some key sectors, but there is also much dynamism in the private sector that is driving new investments.There are clear indications that the increase in capital stock is not taking place uniformly at the same rate in all sectors of the economy. The investments in agriculture are at a slower rate than the investment growth in manufacturing.
Investments in small-scale industries may be slower than in large industries. The investments in some of the service sectors are even faster than in manufacturing. It is not the case that only more capital-intensive sectors attract more capital. The sectors with higher growth potential will also attract more capital, irrespective of capital intensity. Service sector acceleration cannot happen without more investments. Although the capital requirements per unit of output may be smaller than in manufacturing, the very pace of growth in services has meant faster establishment of production capacity.
Is this unequal accumulation of capital across sectors and, of course, regions something to worry about? Is this a source of rising inequality of income? Higher capital per worker implies that there is also a change in the technology of production. If there is no change in this, there will be need for more labour when there is more capital employed for production. More and more investment in capital-intensive sectors may finally lead to changes in technology even in labour-intensive sectors and productivity gains. Therefore, the unequal rates of increase in capital stock do not necessarily limit the rise in productivity to only those sectors where there is faster investment. However, this trickling down of productivity effects to other sectors of the economy can be rather slow, depending on how low the labour productivity is in other sectors.
If the primary impact of this increase in capital stock per unit of labour is to increase the productivity of labour in high-investment sectors, how can the productivity of labour in other sectors improve?
One, of course, is the movement of labour to those sectors where investment is taking place. The great migrations from rural to urban areas, even in economies such as China, after all, reflect such responses in the economy.
The other significant channel of the impact of capital accumulation on productivity across sectors is the investment in infrastructure. Infrastructure sectors either provide services directly, or make their capital stock an input to all the other sectors in the economy.
Thus, if bridges are built, urban infrastructure improves, railways run longer and more frequently, and there is more power that can be actually put to use, the labour productivity of all the sectors that use such infrastructure should improve because either newer technologies can be adopted or the same stock of labour can be used more efficiently.
The allocation of new investments across sectors, therefore, can make a difference to the speed with which productivity effects of new investments are transmitted to other sectors of the economy. Are there adverse effects of more capital per worker in a way that decreases productivity of labour or income of workers?
It is not the higher capital stock per worker that is likely to have an adverse impact on productivity, but the inefficient allocation of this additional capital. For example, building capital stock without actually utilising it can have an adverse effect on productivity elsewhere because underutilised capital stock implies lower returns to investment and therefore lower wages as well.
Poorly maintained capital stock, if there are no resources to maintain it, can bring down the productivity of resources all around, especially if these failed investments are in the infrastructure sector. Poor investment decisions can be made by public sector as much as foreign or private sector investors. The actual gains in labour productivity, then, depend on successful investments.
?Shashanka Bhide is senior Research Counsellor, NCAER. These are his personal views