The sharp decline in productivity means that current investments don?t translate into enough output

Declining productivity in India since 2007 is a major concern that needs to be addressed quickly. The IMF?s regional economic outlook on the Asia and Pacific region estimates that India?s total factor productivity growth rose from 1.8% in 1994 to 3.34% in 2006, before taking a downward spiral and is currently at 2.32%. The data captures the concerns raised by the Prime Minister?s Economic Advisory Council, which has identified inefficient use of investment capital as a major reason for holding back economic growth. The Incremental Capital Output Ratio, showing productivity output of the investments made, was close to 4 since 1980-81, but for FY12 and FY13, it ranges from 5.4 to 11.4 depending on how the ratio is calculated, clearly indicating that investment in the economy is not being translated adequately into growth.

This is where the role of the Cabinet Committee on Investments (CCI) is extremely important as it can help increase productivity by ensuring faster clearances to the projects and ensuring that they take off quickly. The productivity increase will also help in tackling inflationary push coming from the firming up of wages. RBI, in its monetary policy review, has pressed for the need to reduce unit labour costs by improving productivity levels to enable growth in real wages in a non-inflationary way. Moreover, despite declining to 30% level now from its peak of 36.8% of GDP in 2007-08, domestic savings are still high but until productivity increases, this will not translate into higher GDP. A few areas where urgent action is required include making it easier to set up and expand new business, bringing job creation to the core of entitlement schemes, adequate employment generation amid pressure for automation and favouring generation of new jobs over job protection.