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.

3.

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.

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 periods at examining the aggregate growth performance confirm the positive role of productivity in enhancing economic growth particularly in the reform

     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

crisis.

.

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

     The methodology used is the function Standard Growth Accounting incorporating a value added production Time series of Value added by 31 industry computed Time series of Labor input by 31 industry Age, Sex and Education] has been computed in terms of employment and quality [ 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 Manufacturing data set created using published by CSO, Government of India.

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 Employment Share

Industry

Value Added Share Employment Share

(Manufacturing)

Value Added Share Employment Share

Services

Value Added Share Employment Share 0.36

0.68

0.25

0.13

0.17

0.11

0.40

0.19

0.29

0.60

0.27

0.16

0.17

0.11

0.44

0.24

0.23

0.56

0.26

0.19

0.16

0.13

0.50

0.25

0.19

0.54

0.28

0.18

0.16

0.12

0.53

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 Economy

Value Added Growth Labour Input Growth Capital Input Growth

Agriculture

Value Added Growth Labour Input Growth Capital Input Growth

Industry

Value Added Growth Labour Input Growth Capital Input Growth

(Manufacturing)

Value Added Growth Labour Input Growth Capital Input Growth

Services

Value Added Growth Labour Input Growth Capital Input Growth 5.08

2.96

4.31

3.15

0.63

2.37

5.78

4.95

7.62

6.33

3.10

7.07

6.15

3.58

3.81

5.92

5.56

5.27

3.53

1.19

2.61

7.31

5.60

7.91

7.03

5.48

7.93

6.71

8.51

5.46

6.49

3.78

6.11

4.62

1.46

2.61

7.31

3.03

8.54

9.07

3.18

10.06

7.06

5.50

6.75

5.69

4.22

6.77

1.75

0.84

4.73

5.57

4.01

7.30

4.71

3.41

6.39

7.51

5.80

7.35

5.78

4.14

5.77

3.06

1.00

3.29

6.37

4.35

7.77

6.52

3.74

7.67

6.94

5.84

6.04

Sectoral Contribution of Value Added growth

Economy Agriculture Industry (Manufacturing) Services

1980-85

5.08

1.07

1.48

1.05

2.53

1986-90

5.92

1.05

1.93

1.16

2.94

1992-96

6.49

1.30

1.96

1.52

3.23

1997-04

5.69

0.41

1.47

0.72

3.82

1980-04

5.78

0.89

1.68

1.06

3.22

Sources of Value Added Growth: Broad Sectors

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

Value Added Growth Hours Worked Labour Quality Non-ICT Capital ICT Capital TFPG

Agriculture

Value Added Growth Hours Worked Labour Quality Non-ICT Capital ICT Capital TFPG 5.08

1.52

0.11

1.59

0.14

1.71

3.15

0.41

0.14

0.30

0.00

2.30

3.53

0.97

0.11

0.21

0.00

2.24

5.92

2.66

0.19

1.69

0.27

1.10

6.49

1.47

0.15

2.78

0.33

1.77

4.62

1.04

0.10

0.68

0.00

2.80

1.75

0.46

0.11

1.70

0.01

-0.53

5.69

1.62

0.13

2.95

0.23

0.76

5.78

1.79

0.14

2.34

0.24

1.26

3.06

0.69

0.11

0.85

0.00

1.41

Sources of Value Added Growth: Broad Sectors

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

Value Added Growth Hours Worked Labour Quality Non-ICT Capital ICT Capital TFPG

(Manufacturing)

Value Added Growth Hours Worked Labour Quality Non-ICT Capital ICT Capital TFPG 5.78

2.82

-0.06

3.75

0.55

-1.28

6.33

1.05

0.07

3.62

0.84

0.75

7.03

1.41

0.13

3.57

1.61

0.31

7.31

2.21

0.17

3.35

1.01

0.57

7.31

0.99

0.17

4.30

0.93

0.92

9.07

0.56

0.10

5.44

1.45

1.53

4.71

1.01

0.06

4.01

0.41

-0.77

5.57

1.88

0.13

3.34

0.26

-0.03

6.37

1.96

0.10

3.64

0.63

0.03

6.52

1.01

0.08

4.14

0.99

0.29

Sources of Value Added Growth: Broad Sectors

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

Value Added Growth Hours Worked Labour Quality Non-ICT Capital ICT Capital TFPG 6.15

1.59

0.20

1.28

0.01

3.08

6.71

4.10

0.24

1.69

0.02

0.66

7.06

1.92

0.17

3.13

0.17

1.68

7.51

1.99

0.15

3.25

0.31

1.82

6.94

2.35

0.18

2.46

0.15

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 ofTFP 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

Economy Agriculture Industry (Manufacturing) Services

1980-85

1.71

0.78

-0.33

0.12

1.27

1986-90

1.10

0.67

0.15

0.05

0.29

1992-96

1.77

0.78

0.25

0.26

0.74

1997-04

0.76

-0.13

-0.01

-0.13

0.90

1980-04

1.26

0.44

0.01

0.05

0.81

Observations

1980-2004

  Evidence suggest service sectorTFP growth driving economyTFP 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

Our study

TFP

Bosworth and Maertens

1980-90

1.4

2.2

TOTAL ECONOMY

1990-2000

0.9

1.8

2000-04*

0.6

2.1

TFP

Our study Jorgenson and Vu

1989-95

1.4

2.06

1995-03

0.81

2.49

Agriculture

Our study Bosworth and Maertens 1980-90 1990-00 2000-04 1980-90 2.3

0.2

-0.8

-0.4

1.9

0.7

0.9

1.5

Industry

1990-00 -1.1

0.6

Services

2000-04 1980-90 1990-00 2000-04 2.2

1.9

2.4

0.4

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

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 Wholesale trade and commission trade Retail trade Hotels and restaurants Transport and storage Post and telecommunications Financial intermediation Real estate activities Renting of machinery & equipment and other business activities Public admin and defence Education Health and social work Other community, social and personal services Private households with employed persons

VA Growth

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

7.45

6.62

7.97

6.38

12.75

8.92

5.33

13.23

5.79

7.24

8.16

4.07

2.73

TFP Growth

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

2.56

1.89

3.05

1.28

4.67

0.50

0.99

2.62

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 TFP -6,00 -4,00 -2,00 0,00 2,00 4,00 6,00 TFP growth rates are for the period 1980-2004 ; Value Added shares are for 2004

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 Chemicals and Chemical Products Food Products, Beverages and Tobacco Textiles, Textile Products, Leather and Footwear Electrical and Optical Equipment 0.026

0.026

0.020

0.020

0.014

Top 5 TFP and their Value Added shares

Industries

Coke, Refined Petroleum Products and Nuclear Fuel Manufacturing, nec; recycling Electrical and Optical Equipment Chemicals and Chemical Products

Value Added Share

Basic Metals and Fabricated Metal Products TFP growth rates are for the period 1980-2004 ; Value Added shares are for 2004 0.009

0.005

0.014

0.026

0.026

1.29

2.13

0.30

-0.62

2.61

TFP growth

4.37

2.77

2.61

2.13

1.29

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

Industries

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

Organised

2.37

1.03

-5.21

-0.10

5.14

2.71

-2.44

2.88

2.80

1.22

4.01

2.62

5.51

Un Organised

-1.73

-4.47

-9.60

1.12

-1.50

0.03

-2.55

-5.33

-0.45

-2.43

-0.88

-13.12

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 Organised -5,00 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

1.

2.

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 that are receptive to the application of information technologies and increasingly tradable across borders.

(financial, communication, computer, technical, legal, advertising and business) services 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 sector What is happening to modern services in 1990?

Renting of machinery & equipment and other business activities Real estate activities Post and telecommunications Financial intermediation Private households with employed persons Hotels and restaurants Other community, social and personal services Health and social work Education 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 inTFP 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