When productivity falls

Written by Saikat Neogi | Updated: May 2 2013, 05:46am hrs
Two recent reports have underlined that productivity in India is showing a declining trend. Data from the International Monetary Fund shows that India's total factor productivity, which went up from 1.8% in 1994 to 3.34% in 2006, has started declining since then and is currently at 2.32%. Even the Prime Ministers Economic Advisory Council has underlined inefficient use of investment capital as a major reason for holding back economic growth. A steep rise in the Incremental Capital Output Ratio (ICOR)from close to 4 since 1980-81, the computed ICOR for FY12 and FY13 ranges from 5.4 to 11.4, depending on how the ratio is calculatedindicates that investment in the economy is not being translated into growth in final GDP output. One of the major reasons for higher growth from 2005 to 2008 was higher growth in total factor productivity. With slowing growth in capital formation, stalled power projects, higher inflation and policy paralysis at the Centre, total factor productivity has been declining, which will have greater implication on economic competitiveness of the country.