First World KLEMS conferenceHarvard University19-20 August 2010

Productivity Growth in Indian Economy

India KLEMS research team

Deb Kusum DasAbdul ErumbanSuresh AgarwalaDeepika 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 issuesThe 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 EconomyThe study makes several contribution to the

literature on India’s economic growth1.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 and Tendulkar (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 and Virmani (2006)].

WHAT IS THE STORY?

India’s Economic GrowthFactor 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

Agriculture

Value Added Share 0.36 0.29 0.23 0.19

Employment Share 0.68 0.60 0.56 0.54

Industry

Value Added Share 0.25 0.27 0.26 0.28

Employment Share 0.13 0.16 0.19 0.18

(Manufacturing)

Value Added Share 0.17 0.17 0.16 0.16

Employment Share 0.11 0.11 0.13 0.12

Services

Value Added Share 0.40 0.44 0.50 0.53

Employment Share 0.19 0.24 0.25 0.28

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

EconomyValue 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

Agriculture

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

IndustryValue 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

(Manufacturing)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

ServicesValue 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

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

Services 2.53 2.94 3.23 3.82 3.22

Sources of Value Added Growth: Broad Sectors

1980-85 1986-90 1991-96 1997-04 1980-2004

Economy          

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

TFPG 1.71 1.10 1.77 0.76 1.26

Agriculture          

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

Sources of Value Added Growth: Broad Sectors

1980-85 1986-90 1991-96 1997-04 1980-2004

Industry          

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

(Manufacturing)          

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

Sources of Value Added Growth: Broad Sectors

1980-85 1986-90 1991-96 1997-04 1980-2004

Services          

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

TFPG 3.08 0.66 1.68 1.82 1.81

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

TFP 1980-90 1990-2000 2000-04* TFP 1989-95 1995-03

Our study 1.4 0.9 0.6 Our study 1.4 0.81

Bosworth and Maertens 2.2 1.8 2.1 Jorgenson and Vu 2.06 2.49

TOTAL ECONOMY

Agriculture 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 perspectiveKLEMS INDUSTRIES NIC 1998Agriculture, hunting, forestry & fishing 01 to 05Mining & quarrying 10 to 14Food , beverages & tobacco 15 to 16Textiles, leather & footwear 17 to 19Wood & products of wood 20Pulp, paper , printing & publishing 21 to 22Coke, refined petroleum & nuclear fuel 23Chemicals & chemical products 24Rubber & plastics 25Other non-metallic mineral 26Basic metals & fabricated metal 27 to 28Machinery, nec 29Electrical & optical equipment 30 to 33Transport equipment 34 to 35Manufacturing nec; recycling 36Electricity, gas & water supply 40 to 41Construction 45Sale & maintenance of motor vehicles; retail sale of fuel 50Wholesale trade 51Retail trade 52Hotels & restaurants 55Transport & storage 60 to 63Post & telecommunications 64Financial intermediation 65 to 67Real estate activities 70Renting of machinery & equipment 71 to 74Public admin & defence 75Education 80Health & social work 85Other community, social & personal services 90 to 93Private households with employed persons 95

Value Added Growth rate (1980-2004)

Labour Input Growth rate (1980-2004)

Capital Input Growth Rate (1980-2004)

31 sector TFP growth rates (1980-2004)

TFP Growth and Value Added growthIndustries VA Growth TFP GrowthAgriculture, hunting, forestry and fishing 3.06 1.41Mining and quarrying 5.96 -0.05Food , beverages and tobacco 6.07 0.30Textiles, textile , leather and footwear 4.96 -0.62 Wood and of wood and cork -2.22 -9.78Pulp, paper, paper , printing and publishing 5.37 -0.71Coke, refined petroleum and nuclear fuel 11.63 4.37Chemicals and chemical products 9.23 2.13Rubber and plastics 6.00 -2.78Other non-metallic mineral 6.99 0.37Basic metals and fabricated metal 5.97 1.29Machinery, nec 5.46 -0.66Electrical and optical equipment 9.34 2.61Transport equipment 7.47 0.53Manufacturing nec; recycling 10.61 2.77Electricity, gas and water supply 6.84 1.42

Construction 5.64 -1.56

Sale, maintenance and repair of motor vehicles 7.42 2.00

Wholesale trade and commission trade 7.45 2.56

Retail trade 6.62 1.89Hotels and restaurants 7.97 3.05Transport and storage 6.38 1.28 Post and telecommunications 12.75 4.67Financial intermediation 8.92 0.50Real estate activities 5.33 0.99

Renting of machinery & equipment and other business activities 13.23 2.62

Public admin and defence 5.79 3.41Education 7.24 0.51Health and social work 8.16 2.42Other community, social and personal services 4.07 0.12Private households with employed persons 2.73 -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

TFP growth rates are for the period 1980-2004 ; Value Added shares are for 2004

Value Added shares and their TFP: An industry perspective

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

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

Top 5 Value Added shares and their TFP

Top 5 TFP and their Value Added shares

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

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

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)

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

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

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