By Dr Chandrima Sikdar
Labour productivity measures the amount of goods and services produced by one hour of labour. According to the Workforce Analytics Institute (WAI), a partnership between The Conference Board and Mercer, most Asian countries have experienced a slump in labour productivity over last eight years. Indias productivity has gone up the most (2.71%).
Slow and steady growth
Growth in labour productivity requires an increase in human capital, a stock of physical and infrastructure capital, and improvements in technology. India experienced improvements on all these fronts since its economic liberalisation in the nineties. Educational attainment (measured in terms of literacy rate and average years of schooling); and skill development (which results in the growth of human capital) have been rising at a slow but a steady pace. Physical capital (expenditures by firms on commercial real estate, tools and machinery) too has shown robust growth. Same is true for infrastructure capital.
The only exceptions in the last five-six years when both these capital stocks declined was due to unsupportive policy environment. Technological improvements also took place in India due to technology transfer from abroad and spill over effect of the growing software sector. All these positive developments led to an increase in labour productivity in the country.
Speeding up growth
This is good news as increased labour productivity implies greater production potential. However, according to India Ratings and Research, India requires labour productivity to grow at a much higher 7.3% to attain a targeted GDP growth of 10%. Thus, topping the list of labour productivity growth among its Asian peers does not really mean much for Indias current production target. While all factors required for increasing production capacity showed up trends, but Indias manufacturing didnt. However, if this rising labour productivity will give a much-needed boost to the manufacturing sector in India remains to be seen.
Unorganised manufacturing sector
A distinctive feature of this sector is the predominance of small production units, which also includes household enterprises. These units either have less than ten or twenty employees; and use no electricity in the manufacturing process. As per law, these units need not register with the government and are not subject to the Factories Act. These constitute the unorganised manufacturing sector. As the bigger units need to abide by Factories Act production units in the country often prefer to remain small, to avoid following such stringent rules and regulations.
Being small and unorganised has implications on their productivity levels. They lack the economies of large scale production. They are hardly exposed to new and imported technology and equipment and lack the knowledge and ability to use them. Their access to credit is also limited. Thus, in spite of improving production side factors, the predominance of large unorganised sector did not allow manufacturing sector to take much advantage of these improvements.
It has been the organised large scale manufacturing which has taken advantage of these improving factors. However, for long, this sector has performed below potential. According to McKinsey benchmarking study, Indias manufacturers lag behind their global peers in production planning, supply chain management, quality, maintenance, talent management and capability building. Thus, their labour productivity and capital productivity is way below the global standards.
These challenges need to be addressed immediately to make manufacturing realise its full potential. Improved labour productivity is an encouraging development. However, much needs to be done before it can reach the levels where it can give “the” big push to manufacturing. Only then can labour productivity in India reach the levels where it can give the big push to manufacturing. Central and State governments should focus on addressing the issues of the unorganised sector and on reducing barriers in markets for land, labour, and infrastructure. Besides, large-scale organised units should themselves aim at improving their competitiveness by managing their operational inefficiencies and developing targeted programs to train their employees. Much of the success of an initiative like Make in India rests on how well these challenges are overcome.
Dr Chandrima Sikdar is the Professor and Area Chairperson (Economics), in Narsee Monjee Institute of Management Studies (NMIMS), Mumbai. She is also the Managing Editor of NMIMS journal of Economics & Public Policy, and Editor of NMIMS SBM Working Paper Series.
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