- World around, notable economists and policymakers would be grossly worried about the way economic reforms are panning out in some of the most advanced nations alongside those aspiring to be counted among the developed ones. The phenomenon being played out over the last few years on the economic front largely aimed at improving overall productivity appears to be skewed. The geostrategic and geopolitical situations are dynamically evolving need no further elaboration. And developments having global ramifications like the pandemic and the ongoing Russia-Ukraine conflict only exacerbate the situation. To an expert eye, something appears amiss despite government and economic thinktank pressing ahead with much-needed policy reforms.
PC: AMAN KUMAR
- Against this backdrop, reports of productivity taking a hit makes one pause and think about the consequences. The productivity challenges are not unique to any one country but perhaps deserve to be assessed as the world’s most serious long-term threat of economic stagnation and social turmoil. Productivity is the measure of the output that can be extracted from a combination of inputs. Increasing this measure is the most important durable source of economic growth. Mind you, western economies began to experience a decline in total factor productivity (TFP) in the 1990s, with the problem getting acute after the 2008 financial crisis. Despite consistent double-digit growth over four long decades, China too is facing a decline in TFP.
- China and India provide interesting contrasts. China’s TFP annual average growth in the 2000s was 3.5% as the WTO membership helped it become the world’s factory. In the next decade, TFP growth slowed to 0.7%, a phase of property bubbles and a fall in the share of private consumption in relation to GDP. India in the 2010s recorded a much higher TFP growth of 2.2%. As mentioned above, parsing India’s performance over the last decade, however, shows that we too are in danger of losing steam. Between 2014 and 2017, TFP growth received a boost from non-market services like public administration. Pragmatically speaking, it’s not a durable source of growth. Moreover, by 2018-19, TFP growth began to lose momentum.
PC: LUCA VENTURA
- Needless to mention, productivity enhancement is the pathway to prosperity. When seen in this context, India’s agricultural sector presents the biggest challenge. Remember, agriculture contributes about 18% of the economy’s annual gross value addition but employs about 41% of the workforce. A substantial number of workers are relatively unproductive, producing a small part of the economic output. As such, India’s economic advancement depends crucially on getting them out of agriculture to more productive sectors. What’s holding back productivity growth globally? A reluctance to carry out deep economic reforms and succumbing to the lure of protectionism are perhaps the biggest obstacles to TFP growth today. This should be addressed.