By R Gopalan & MC Singhi

Despite economic reforms, the GDP share of agriculture (16-19%), manufacturing (17-19%) and services (50-53%) have largely remained range-bound. This stickiness has been largely due to poor productivity growth. KLEM data set indicates that over 43 years (1980-2024) when the overall growth of gross value added (GVA) averaged 5.80%, total factor productivity (TFP) growth contributed to just 10% of this and the remaining 90% came from the growth of inputs and their quality improvement. A real upsurge in GVA growth was observed from 2000-01 to 2010-11 when it averaged 6.6%, yet the TFP growth was only 0.4%.

Average annual growth of capital was 7.69% in 2001-11, the decade of the highest GVA growth. The average TFP growth of only 0.4% was due to negative figures in the first two years. During the five-year period of 2003-2008, TFP growth averaged 1.19% with GVA growth averaging 7.6%. TFP growth shows continuous moderation from 1.13% annually during 1980-1990 to 0.1 % in the most recent period of 2011-24, averaging 0.58% for 43 years. During 1982-83, 1988-89, 1995-96, and 2021-22, TFP growth exceeded 3%. As a residual growth not based on resource accounting, fluctuations in TFP growth have been significant with a standard deviation of 2.33 and a coefficient of variation of over 400%. In the last three years, TFP revived to average a growth of 2.13%.

There is a strong correlation between TFP and GVA growths. Average GVA growth exceeded 7.7% in years when TFP growth was above 2%. During the 15 years which witnessed negative TFP growth over the entire reference period of 43 years, not only did GVA growth not exceed 6% but the average was only slightly above 5%. We observe a significant correlation between GVA growth and the ratio of capital stock to GVA and TFP.

Inter-industry and sectoral differences in capital intensity, TFP, and employment growth have significantly varied over 1980-2023 (see graphic broadly summarising the sectoral outcomes).

Capital stock to GVA ratio is low in manufacturing sectors of machinery, petroleum products, transport equipments, and TFP has been negative in these sectors. This indicates there is hardly any innovation over acquired technology. These have a sizeable presence of public sector entities (railways in transport equipment). We believe technology levels in these sectors have rather been static.

In metals and fabricated metal products and non-metallic mineral products (primarily cement), the sheer volume may have been a trade barrier. Therefore, despite a moderate capital intensity as reflected by the ratio of capital stock to GVA, TFP is negative. Here too the acquired technology may not have seen any further breakthrough.

The highest or positive TFP within manufacturing is observed in electrical and optimal equipments; chemical products, paper, printing and publishing, textiles, and food products. These products, like mobiles, drugs and pharmaceuticals, have not only entered the common man’s consumption basket, but may have seen innovation, technological upgrade and strengthening against open competition. Textiles, leather, and food products have also seen reasonable employment growth. These are the strong resilient sectors with positive TFP. Policies must focus on their development.

In services, the best performer in terms of TFP is public administration and defence. Digitisation seems to have helped. Education, health, financial services, trade, hotels and restaurants, and construction have low capital intensity but varying TFP growth. Trade and construction have negative TFP, which is understandable for trade but somewhat perplexing for construction because it has seen mechanisation in a big way. Perhaps the cheap labour moving away from agriculture has given it the scale and TFP may improve with time. Further, a sharp negative growth of over 14% in the Covid year, equally sharp negative growth in 1982-83, and negative TFP growth during the 2008-09 global meltdown were contributing factors. Another surprise is in business services, recording the highest employment growth but with zero TFP. Business services have an embedded element of product and it can be traded over long distances. Surprisingly it shows a consistent negative TFP during 2008-12 and a reduced overall TFP growth in 2017-18. The 2008-12 period witnessed a global meltdown and 2017-18 saw domestic structural reforms.

We believe the government and the private sector have a role to play in upgrading technology in the laggards. Where consumer penetration is important, without better TFP growth higher GVA growth may not be feasible. The ministry of heavy industries’ initiative of Common Technology Development and Service Infrastructure or performance-linked incentive scheme would need continuous fine-tuning with emphasis on value addition. Consistent growth in the vicinity of 7% will be feasible only with a good TFP growth and increase in capital stock per unit of GVA.

The authors are former civil servants

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