Transcript Productivity - WORLD KLEMS

Productivity Growth in
Indian Economy
First World KLEMS conference
Harvard University
19-20 August 2010
India KLEMS research team
Deb Kusum Das
Abdul Erumban
Suresh Agarwala
Deepika Wadhwa
India KLEMS database created
by
Gunajit Kalita and Suvojit Bhattacharjee
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
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
TFP growth in Indian Economy
The study makes several contribution to the literature on India’s
economic growth
1. Comprehensive and detailed sector analysis of the Indian
economy using the India KLEMS dataset.
2. Productivity (TFP) growth computed using the growth
accounting methodology incorporating a value added function
3. Measures of labor and capital input recognize the heterogeneity
of different types of workers and assets.
4. TFP growth is computed for organized and unorganized
segments of manufacturing
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 andTendulkar (2003), Kohli, (2006 a and b)
“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 andVirmani (2006)].
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
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.
Structure of the Indian Economy – Value Added and
Employment share
1980
1990
2000
2004
Value Added Share
0.36
0.29
0.23
0.19
Employment Share
0.68
0.60
0.56
0.54
Value Added Share
0.25
0.27
0.26
0.28
Employment Share
0.13
0.16
0.19
0.18
Value Added Share
0.17
0.17
0.16
0.16
Employment Share
0.11
0.11
0.13
0.12
0.40
0.44
0.50
0.53
0.19
0.24
0.25
0.28
Agriculture
Industry
(Manufacturing)
Services
Value Added Share
Employment Share
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.
Growth of Value Added, Labor and Capital inputs (per cent
per annum)
1980-85
1986-90
1992-96
1997-04
1980-2004
Value Added Growth
5.08
5.92
6.49
5.69
5.78
Labour Input Growth
2.96
5.56
3.78
4.22
4.14
Capital Input Growth
4.31
5.27
6.11
6.77
5.77
Value Added Growth
3.15
3.53
4.62
1.75
3.06
Labour Input Growth
0.63
1.19
1.46
0.84
1.00
Capital Input Growth
2.37
2.61
2.61
4.73
3.29
Value Added Growth
5.78
7.31
7.31
5.57
6.37
Labour Input Growth
4.95
5.60
3.03
4.01
4.35
Capital Input Growth
7.62
7.91
8.54
7.30
7.77
Value Added Growth
6.33
7.03
9.07
4.71
6.52
Labour Input Growth
3.10
5.48
3.18
3.41
3.74
Capital Input Growth
7.07
7.93
10.06
6.39
7.67
Value Added Growth
6.15
6.71
7.06
7.51
6.94
Labour Input Growth
3.58
8.51
5.50
5.80
5.84
Capital Input Growth
3.81
5.46
6.75
7.35
6.04
Economy
Agriculture
Industry
(Manufacturing)
Services
Sectoral Contribution of Value Added growth
1980-85
1986-90
1992-96
1997-04
1980-04
Economy
5.08
5.92
6.49
5.69
5.78
Agriculture
1.07
1.05
1.30
0.41
0.89
Industry
1.48
1.93
1.96
1.47
1.68
(Manufacturing)
1.05
1.16
1.52
0.72
1.06
2.53
2.94
3.23
3.82
3.22
Services
Sources of Value Added Growth: Broad Sectors
1980-85
1986-90
1991-96
1997-04
1980-2004
Value Added Growth
5.08
5.92
6.49
5.69
5.78
Hours Worked
1.52
2.66
1.47
1.62
1.79
Labour Quality
0.11
0.19
0.15
0.13
0.14
Non-ICT Capital
1.59
1.69
2.78
2.95
2.34
ICT Capital
0.14
0.27
0.33
0.23
0.24
1.71
1.10
1.77
0.76
1.26
Value Added Growth
3.15
3.53
4.62
1.75
3.06
Hours Worked
0.41
0.97
1.04
0.46
0.69
Labour Quality
0.14
0.11
0.10
0.11
0.11
Non-ICT Capital
0.30
0.21
0.68
1.70
0.85
ICT Capital
0.00
0.00
0.00
0.01
0.00
TFPG
2.30
2.24
2.80
-0.53
1.41
Economy
TFPG
Agriculture
Sources of Value Added Growth: Broad Sectors
1980-85
1986-90
1991-96
1997-04
1980-2004
Value Added Growth
5.78
7.31
7.31
5.57
6.37
Hours Worked
2.82
2.21
0.99
1.88
1.96
Labour Quality
-0.06
0.17
0.17
0.13
0.10
Non-ICT Capital
3.75
3.35
4.30
3.34
3.64
ICT Capital
0.55
1.01
0.93
0.26
0.63
TFPG
-1.28
0.57
0.92
-0.03
0.03
Value Added Growth
6.33
7.03
9.07
4.71
6.52
Hours Worked
1.05
1.41
0.56
1.01
1.01
Labour Quality
0.07
0.13
0.10
0.06
0.08
Non-ICT Capital
3.62
3.57
5.44
4.01
4.14
ICT Capital
0.84
1.61
1.45
0.41
0.99
TFPG
0.75
0.31
1.53
-0.77
0.29
Industry
(Manufacturing)
Sources of Value Added Growth: Broad Sectors
1980-85
1986-90
1991-96
1997-04
1980-2004
Value Added Growth
6.15
6.71
7.06
7.51
6.94
Hours Worked
1.59
4.10
1.92
1.99
2.35
Labour Quality
0.20
0.24
0.17
0.15
0.18
Non-ICT Capital
1.28
1.69
3.13
3.25
2.46
ICT Capital
0.01
0.02
0.17
0.31
0.15
3.08
0.66
1.68
1.82
1.81
Services
TFPG
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.
Sectoral Contribution to Productivity growth
1980-85
1986-90
1992-96
1997-04
1980-04
Economy
1.71
1.10
1.77
0.76
1.26
Agriculture
0.78
0.67
0.78
-0.13
0.44
Industry
-0.33
0.15
0.25
-0.01
0.01
(Manufacturing)
0.12
0.05
0.26
-0.13
0.05
Services
1.27
0.29
0.74
0.90
0.81
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
Productivity growth by sectors and economy: Comparison
TOTAL ECONOMY
TFP
1980-90
1990-2000
2000-04*
Our study
1.4
0.9
0.6
Bosworth and Maertens
2.2
1.8
2.1
Agriculture
TFP
1989-95
1995-03
Our study
1.4
0.81
Jorgenson and Vu
2.06
2.49
Industry
Services
1980-90
1990-00
2000-04
1980-90
1990-00
2000-04
1980-90
1990-00
2000-04
Our study
2.3
0.2
-0.8
-0.4
-1.1
2.2
1.9
2.4
0.4
Bosworth and
Maertens
1.9
0.7
0.9
1.5
0.6
1.6
2.1
3.1
1.9
Examining Growth- The 31 sector perspective
KLEMS INDUSTRIES
Agriculture, hunting, forestry & fishing
Mining & quarrying
Food , beverages & tobacco
Textiles, leather & footwear
Wood & products of wood
Pulp, paper , printing & publishing
Coke, refined petroleum & nuclear fuel
Chemicals & chemical products
Rubber & plastics
Other non-metallic mineral
Basic metals & fabricated metal
Machinery, nec
Electrical & optical equipment
Transport equipment
Manufacturing nec; recycling
Electricity, gas & water supply
Construction
Sale & maintenance of motor vehicles; retail sale of fuel
Wholesale trade
Retail trade
Hotels & restaurants
Transport & storage
Post & telecommunications
Financial intermediation
Real estate activities
Renting of machinery & equipment
Public admin & defence
Education
Health & social work
Other community, social & personal services
Private households with employed persons
NIC 1998
01 to 05
10 to 14
15 to 16
17 to 19
20
21 to 22
23
24
25
26
27 to 28
29
30 to 33
34 to 35
36
40 to 41
45
50
51
52
55
60 to 63
64
65 to 67
70
71 to 74
75
80
85
90 to 93
95
Value Added Growth rate (1980-2004)
Private households with employed persons
Other community, social and personal services
Health and social work
Education
Public admin and defence; compulsory social security
Renting of machinery & equipment
Real estate activities
Financial intermediation
Post and telecommunications
Transport and storage
Hotels and restaurants
Retail trade
Wholesale trade and commission trade
Sale, maintenancef motor vehicles
Construction
Electricity, gas and water supply
Manufacturing nec; recycling
Transport equipment
Electrical and optical equipment
Machinery, nec
Basic metals and fabricated metal
Other non-metallic mineral
Rubber and plastics
Chemicals and chemical products
Coke, refined petroleum and nuclear fuel
Pulp, paper, paper , printing and publishing
Wood and of wood and cork
Textiles, textile , leather and footwear
Food , beverages and tobacco
Mining and quarrying
Agriculture, hunting, forestry and fishing
-4
-2
0
2
4
6
8
10
12
14
16
Labour Input Growth rate (1980-2004)
Private households with employed persons
Other community, social and personal services
Health and social work
Education
Public admin and defence; compulsory social…
Renting of machinery & equipment
Real estate activities
Financial intermediation
Post and telecommunications
Transport and storage
Hotels and restaurants
Retail trade
Wholesale trade and commission trade
Sale, maintenancef motor vehicles
Construction
Electricity, gas and water supply
Manufacturing nec; recycling
Transport equipment
Electrical and optical equipment
Machinery, nec
Basic metals and fabricated metal
Other non-metallic mineral
Rubber and plastics
Chemicals and chemical products
Coke, refined petroleum and nuclear fuel
Pulp, paper, paper , printing and publishing
Wood and of wood and cork
Textiles, textile , leather and footwear
Food , beverages and tobacco
Mining and quarrying
Agriculture, hunting, forestry and fishing
0
2
4
6
8
10
12
14
Capital Input Growth Rate (1980-2004)
Private households with employed persons
Other community, social and personal services
Health and social work
Education
Public admin and defence; compulsory social…
Renting of machinery & equipment
Real estate activities
Financial intermediation
Post and telecommunications
Transport and storage
Hotels and restaurants
Retail trade
Wholesale trade and commission trade
Sale, maintenancef motor vehicles
Construction
Electricity, gas and water supply
Manufacturing nec; recycling
Transport equipment
Electrical and optical equipment
Machinery, nec
Basic metals and fabricated metal
Other non-metallic mineral
Rubber and plastics
Chemicals and chemical products
Coke, refined petroleum and nuclear fuel
Pulp, paper, paper , printing and publishing
Wood and of wood and cork
Textiles, textile , leather and footwear
Food , beverages and tobacco
Mining and quarrying
Agriculture, hunting, forestry and fishing
0
2
4
6
8
10
12
14
31 sector TFP growth rates (1980-2004)
Post and Telecommunication
Coke, Refined Petroleum Products and Nuclear Fuel
Public Administration and Defence;
Hotels and Restaurants
Manufacturing, nec; recycling
Renting of machinery & equipment
Electrical and Optical Equipment
Wholesale Trade and Commission Trade
Health and Social Work
Chemicals and Chemical Products
Sale, Maintenance and Repair of Motor Vehicles
Retail Trade
Electricity, Gas and Water Supply
Agriculture, Hunting, Forestry and Fishing
Basic Metals and Fabricated Metal Products
Transport and Storage
Real Estate Activities
Transport Equipment
Education
Financial Intermediation
Other Non-Metallic Mineral Products
Food Products, Beverages and Tobacco
Other Community, Social and Personal Services
Mining and Quarrying
Textiles, Textile Products, Leather and Footwear
Machinery, nec.
Pulp, Paper, Printing and Publishing
Private Household with Employed Persons
Construction
Rubber and Plastic Products
Wood and Products of Wood
-12
-10
-8
-6
-4
-2
0
2
4
6
TFP Growth and Value Added growth
Industries
VA Growth
TFP Growth
Agriculture, hunting, forestry and fishing
Mining and quarrying
Food , beverages and tobacco
Textiles, textile , leather and footwear
Wood and of wood and cork
Pulp, paper, paper , printing and publishing
Coke, refined petroleum and nuclear fuel
Chemicals and chemical products
Rubber and plastics
Other non-metallic mineral
Basic metals and fabricated metal
Machinery, nec
Electrical and optical equipment
Transport equipment
Manufacturing nec; recycling
Electricity, gas and water supply
Construction
Sale, maintenance and repair of motor vehicles
3.06
5.96
6.07
4.96
-2.22
5.37
11.63
9.23
6.00
6.99
5.97
5.46
9.34
7.47
10.61
6.84
5.64
7.42
1.41
-0.05
0.30
-0.62
-9.78
-0.71
4.37
2.13
-2.78
0.37
1.29
-0.66
2.61
0.53
2.77
1.42
-1.56
2.00
Wholesale trade and commission trade
7.45
2.56
Retail trade
Hotels and restaurants
Transport and storage
Post and telecommunications
Financial intermediation
Real estate activities
6.62
7.97
6.38
12.75
8.92
5.33
1.89
3.05
1.28
4.67
0.50
0.99
Renting of machinery & equipment and other business activities
13.23
2.62
Public admin and defence
Education
Health and social work
Other community, social and personal services
Private households with employed persons
5.79
7.24
8.16
4.07
2.73
3.41
0.51
2.42
0.12
-1.07
Growth difference of TFP between 1990s and 1980s &
2000s and 1990s
TFP growth contribution to aggregate value added
growth: 1980-2004 (per cent)
What’s happened to Manufacturing ?
Despite deregulations in industrial polices since 1985 and complete over
hauling of trade policies in 1991 reforms, why is the manufacturing
performance elusive?
With a turn around in TFP growth in mid 1980s (Ahluwalia 1991) due to
emerging policy changes, the manufacturing sector has not shown
improvements in TFP in 1990s when substantial reforms were
implemented [ Goldar (1999), Das(2004)]. WHY? We need to know what
constrains manufacturing TFP?
In the evidences we present, service sector is driving TFP growth for the
period 1980-2004 with manufacturing performance lagging behind. It
would be interesting to examine the TFP growth performance within
manufacturing sector?
•In particular, where is TFP growth happening?
•What is happening to manufacturing industries which command sizeable
value added share?
• Is there any organized-unorganized dynamics within observed
performance?
Value Added shares and TFP – Manufacturing sectors
Basic Metals and Fabricated Metal Products
Chemicals and Chemical Products
Food Products, Beverages and Tobacco
Textiles, Textile Products, Leather and Footwear
Electrical and Optical Equipment
Coke, Refined Petroleum Products and Nuclear Fuel
Transport Equipment
Machinery, nec.
Other Non-Metallic Mineral Products
Rubber and Plastic Products
Manufacturing, nec; recycling
Pulp, Paper, Printing and Publishing
Wood and Products of Wood
-12.00
-10.00
-8.00
VA
-6.00
-4.00
-2.00
TFP
TFP growth rates are for the period 1980-2004 ; Value Added shares are for 2004
0.00
2.00
4.00
6.00
Value Added shares and their TFP: An industry perspective
Top 5 Value Added shares and their TFP
Industries
Value Added Share
TFP growth
Basic Metals and Fabricated Metal Products
0.026
1.29
Chemicals and Chemical Products
0.026
2.13
Food Products, Beverages and Tobacco
0.020
0.30
Textiles, Textile Products, Leather and Footwear
0.020
-0.62
Electrical and Optical Equipment
0.014
2.61
Top 5 TFP and their Value Added shares
Industries
Value Added Share
TFP growth
Coke, Refined Petroleum Products and Nuclear Fuel
0.009
4.37
Manufacturing, nec; recycling
0.005
2.77
Electrical and Optical Equipment
0.014
2.61
Chemicals and Chemical Products
0.026
2.13
Basic Metals and Fabricated Metal Products
0.026
1.29
TFP growth rates are for the period 1980-2004 ; Value Added shares are for 2004
TFP growth in Manufacturing: Organised and Un Organised
industries 1980-2004 (per cent per annum)
Industries
Organised
Un Organised
Food , beverages & tobacco
2.37
-1.73
Textiles, leather & footwear
1.03
-4.47
Wood & products of wood
-5.21
-9.60
Pulp, paper , printing & publishing
-0.10
1.12
Coke, refined petroleum & nuclear fuel
5.14
-1.50
Chemicals & chemical products
2.71
0.03
Rubber & plastics
-2.44
-2.55
Other non-metallic mineral
2.88
-5.33
Basic metals & fabricated metal
2.80
-0.45
Machinery, nec
1.22
-2.43
Electrical & optical equipment
4.01
-0.88
Transport equipment
2.62
-13.12
Manufacturing nec; recycling
5.51
1.91
Value Added Growth Rates for Total, Organised and Un
Organised Manufacturing
Manufacturing nec; recycling
Transport equipment
Electrical and optical equipment
Machinery, nec
Basic metals and fabricated metal
Other non-metallic mineral
Rubber and plastics
Chemicals and chemical products
Coke, refined petroleum and nuclear fuel
Pulp, paper, paper , printing and publishing
Wood and of wood and cork
Textiles, textile , leather and footwear
Food , beverages and tobacco
-4
-2
Un Organised
0
Organised
2
4
6
Total manufacturing
8
10
12
14
Total manufacturing, Organised and Unorganised TFP growth
rates (1980-2004)
Manufacturing nec; recycling
Transport equipment
Electrical and optical equipment
Machinery, nec
Basic metals and fabricated metal
Other non-metallic mineral
Rubber and plastics
Chemicals and chemical products
Coke, refined petroleum and nuclear fuel
Pulp, paper, paper , printing and publishing
Wood and of wood and cork
Textiles, textile , leather and footwear
Food , beverages and tobacco
-15.00
-10.00
Un Organised
-5.00
Organised
Total manufacturing
0.00
5.00
10.00
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.
1.
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.
2.
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?
TFP growth rate in the Service sector (1980-2004)
Post and telecommunications
Public admin and defence
Hotels and restaurants
Renting of machinery & equipment
Wholesale trade and commission trade
Health and social work
Sale, maintenance and repair of motor vehicles
Retail trade
Transport and storage
Real estate activities
Education
Financial intermediation
Other community, social and personal services
Private households with employed persons
-2
-1
0
1
2
3
4
5
TFP difference between 1990s and 1980s: Service sectorWhat is happening to modern services in 1990?
Modern
Renting of machinery & equipment and other business activities
Real estate activities
Post and telecommunications
Financial intermediation
Hybrid
Private households with employed persons
Hotels and restaurants
Other community, social and personal services
Health and social work
Education
Traditional
Sale, maintenance of motor vehicles
Public admin and defence
Transport and storage
Retail trade
Wholesale trade and commission trade
-10
-8
-6
-4
-2
0
2
4
6
8
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.
Sectoral contribution to aggregate manufacturing
and services productivity
THANK YOU
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