Productivity Growth in Indian Economy

1. First World KLEMS conference Harvard University 19-20 August 2010 Productivity Growth in Indian Economy

2. India KLEMS research team Deb Kusum Das Abdul Erumban Suresh Agarwala Deepika Wadhwa India KLEMS database created by Gunajit Kalita and Suvojit Bhattacharjee

3. Objective of the Study To document and examine Total Factor Productivity (TFP) growth trends for Indian economy, broad sectors and 31 India KLEMS sectors comprising the economy

4. The issues The study seeks to examine India’s long term growth experience by attempting to identify the sources of observed value added growth. We seek an examine if factor accumulation or productivity growth drives the observed growth performance of the Indian economy. The paper addresses this issue by examining the TFP growth performance of the 31 sectors comprising the Indian economy

5. TFP growth in Indian Economy The study makes several contribution to the literature on India’s economic growth Comprehensive and detailed sector analysis of the Indian economy using the India KLEMS dataset. Productivity (TFP) growth computed using the growth accounting methodology incorporating a value added function Measures of labor and capital input recognize the heterogeneity of different types of workers and assets. TFP growth is computed for organized and unorganized segments of manufacturing

6. Indian Economy 1980-2004 The emphasis on gradualism and evolutionary transition rather than rapid restructuring Since the advent of gradual economic liberalization from the 1980s and the overhauling of the license raj regime in the 1991-92, Indian economy has been on a higher growth trajectory. India’s annual growth rate accelerated from a moderate rate of 3.5 percent till 1980s to over 7 percent per annum by 2005. The aggregate growth performance has been generally supported by individual sectors of the Indian economy. Nevertheless, two issues have emerged - one, the inability of the manufacturing sector to contribute substantially to the overall growth and the service sector led growth momentum to the overall growth in the 1990s. The large number of documented evidence on India’s growth performance stress by and large the twin roles of, “pro market reforms” of 1980s as well as widespread economy wide reforms” of 1990s and 2000s in sustaining the growth rate. Prominent studies include Williamson and Zagha (2002); Delong J (2003), Basu and Maertens(2007), Panagariya (2008); Kochar et al (2009). The debate on factors underlying the observed growth in India is far from settled, see Rodrik and Subramaniam, (2005), Panagariya (2008), Srinivasan and Tendulkar (2003), Kohli, (2006 a and b)

7. “Examining Growth” Attempts at examining the aggregate growth performance confirm the positive role of productivity in enhancing economic growth particularly in the reform periods Sivasubramonian (2001), Dholakia (2002), Guha and Bari (2003), Virmani (2004), Bosworth Collins and Virmani (2006)].

8. WHAT IS THE STORY? India’s Economic Growth Factor Accumulation or Productivity Growth? “The newly industrializing countries of Asia, like the soviet union of the 1950 have achieved rapid growth in large part due to astonishing mobilization of resources. Once one accounts for the role of rapidly growing inputs in these countries’ growth, one finds little left to explain, Asian growth like that of Soviet Union in its high growth era, seems to be driven by extraordinary growth in inputs like labor and capital rather than gains in efficiency…….” Paul Krugman

9. TFP growth- Time Period, Methodology and Data TFP growth computed for 1980-2004 and sub periods-1980-85, 1986-90, 1992-96 and 1997-2004. The periods 1980-85 and 1986-90 represents piece meal deregulations and pro business/pro- market reforms, where as the periods 1992-96 and 1997-2004 represent the policy reforms of 1991-92 and consolidation of those reforms. The year 1991-92 has been excluded from our analysis on account of being a year of economic crisis. The methodology used is the Standard Growth Accounting incorporating a value added production function Time series of Value added by 31 industry computed Time series of Labor input by 31 industry has been computed in terms of employment and quality [ Age, Sex and Education] Time series of Capital input by 31 industry has been computed using a capital service measure built from different assets [Structures and Equipments- ICT and non ICT] Data sources used are National Accounts Data published by CSO, Government of India. Manufacturing data set created using Annual Survey of Industries for organized segment, whereas NSSO rounds were used for unorganized segment.

10. Structure of the Indian Economy – Value Added and Employment share

11. Structure of the Indian Economy – Value Added and Employment share Agriculture remains the largest employment provider for all periods followed respectively by industry, and services suggesting the dominance of primary sector employment in the economy. In terms of value added share, we find the emergence of service sector as a leading contributor since the 1990s, an observation made by many previous studies. The employment share of service sector, however, remains below that of agriculture by almost 50 percentage points throughout 1990s and 2000s. Despite gradual as well as complete overhauling of industrial and trade policies in the 1980s and 1990s, the share of manufacturing sector in total value added remains stagnant throughout the period.

12. Growth of Value Added, Labor and Capital inputs (per cent per annum)

13. Sectoral Contribution of Value Added growth

14. Sources of Value Added Growth: Broad Sectors

15. Sources of Value Added Growth: Broad Sectors

16. Sources of Value Added Growth: Broad Sectors

17. Observations TFP growth smaller than 2 percent for economy and even smaller for industry and services. TFP growth in service sector close to 2, while TFP growth in A on pattern of economy Sub period observations show (1) agriculture remains around 2 % for first 3 periods and then declines; Manufacturing show an improvement in 1990s-I as compared to 1980s. It however declines in 1990-II. (3) Service sector starts with 3% in 1980-I and then low growth in next sub periods. Contribution of TFP by and large low and thus FA Capital input contribution more than labor input within FA. In sectors, we find dominance of non ICT capital In sectors, we also find evidence of improvements in ICT capital contributions, even though small.

18. Sectoral Contribution to Productivity growth

19. Observations 1980-2004 Evidence suggest service sector TFP growth driving economy TFP growth Second best contribution comes from Agriculture 1980-85, 1986-90, 1992-96 and 1997-04 Service sector drives productivity growth even in the sub periods even though we find decline in 1980-II and improvements in 1990s In late 1990s, service sector contribution is striking when compared with other sectors Contribution from manufacturing reflects the low growth performance of the sector

20. Productivity growth by sectors and economy: Comparison

21. Examining Growth- The 31 sector perspective

22. Value Added Growth rate (1980-2004)

23. Labour Input Growth rate (1980-2004)

24. Capital Input Growth Rate (1980-2004)

25. 31 sector TFP growth rates (1980-2004)

26. TFP Growth and Value Added growth

27. Growth difference of TFP between 1990s and 1980s & 2000s and 1990s

28. TFP growth contribution to aggregate value added growth: 1980-2004 (per cent)

29. What’s happened to Manufacturing ?

30. Value Added shares and TFP – Manufacturing sectors

31. Value Added shares and their TFP: An industry perspective

32. TFP growth in Manufacturing: Organised and Un Organised industries 1980-2004 (per cent per annum)

33. Value Added Growth Rates for Total, Organised and Un Organised Manufacturing

34. Total manufacturing, Organised and Unorganised TFP growth rates (1980-2004)

35. Service sector driven TFP growth for Indian Economy? At the economy level, we find evidence of major contribution to TFP growth via service sector Eichengreen and Poonam Gupta (2009) identify two waves of service sector growth, a first wave in countries with relatively low levels of per capita GDP and a second wave in countries with higher per capita incomes. The first wave appears to be made up primarily of traditional services, the second wave of modern services (financial, communication, computer, technical, legal, advertising and business) services that are receptive to the application of information technologies and increasingly tradable across borders. In addition, there is evidence of the second wave occurring at lower income levels after 1990. We seek to examine if the second wave is also applicable for India?

36. TFP growth rate in the Service sector (1980-2004)

37. TFP difference between 1990s and 1980s: Service sector- What is happening to modern services in 1990?

38. The Bottom Line Though we find overwhelming evidence of factor accumulation in explaining sources of value added growth in Indian economy. Yet it would still be pertinent to assess which are the sectors which are contributing to aggregate productivity in Manufacturing and Services sector with a view to further strengthen policies to arrest the decline in TFP growth in Indian manufacturing sector.

39. Sectoral contribution to aggregate manufacturing and services productivity

40. We would like to acknowledge with gratitude the financial support to the India KLEMS project from the RESERVE BANK OF INDIA To all those officials at CSO and other data generating agencies, who clarified and gave research insights on data as well as generated data as per our requirements THANK YOU