Low labour productivity has been a persistent concern for India, and recent data points to significant contractions across various industries. An analysis of the latest KLEMS (Capital, Labour, Energy, Material and Service) database released by the Reserve Bank of India reveals that nine out of 27 industries experienced a decline in labour productivity in FY23 compared with the previous year, with eight of these industries belonging to the manufacturing sector. This decline highlights India’s lack of competitiveness in industrial sectors and poses a significant challenge to the country’s economic growth and development aspirations.
Labour productivity, which measures the efficiency of labour in producing goods and services, is a crucial metric for assessing economic growth, competitiveness, and living standards. However, the data from the KLEMS database paints a concerning picture. The textiles, leather & footwear industry saw the highest contraction in labour productivity at 14.2%, followed by the chemical products industry (12%), rubber & plastic products industry (11.8%), electrical equipment industry (7.1%), and manufacturing & recycling industry (5.8%). Conversely, some sectors showed significant improvements. The hotels & restaurant industry experienced a 35% increase in labour productivity, followed by coke, refined & petroleum products (16%), and posts & telecommunication (15%). However, these gains are overshadowed by the broader decline in other key sectors.
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Labour productivity decline across sectors
The data indicates a decline in labour quality in 11 out of 27 industries, with the rubber & plastic products industry witnessing the steepest decline at 5%, followed by the chemical products industry (4.4%) and the printing & publishing industry (2.9%). This decline in labour quality exacerbates the overall productivity issue. Several factors contribute to India’s low labour productivity. Rituparna Chakraborty, co-founder of Teamlease Services, attributes the decline in productivity to the deteriorating quality of labour, stemming from a dysfunctional ecosystem of education, skilling, and employability. Despite various initiatives, India’s education and skilling systems have struggled to produce a workforce with the necessary skills and capabilities.
Labor productivity growth from 2013 to 2021
Finance Minister Nirmala Sitharaman, in discussions about the future of India’s economy, has emphasised the need to boost employment, labour participation, and skilling. The government’s call for Viksit Bharat or Developed India by 2047 highlights the urgency of creating more jobs and ensuring that the workforce possesses practical and relevant skills. However, India remains among the lowest in terms of GDP per hour worked among 15 global economies. The focus has often been on pockets of high-skilled sectors, such as information technology, while neglecting traditionally labour-intensive sectors. This approach has resulted in significant disparities in labour productivity and wages across different sectors.
Technological advancements and investment in productivity-enhancing technologies are crucial for improving labour productivity. Historically, significant investments in technology have been driven by labour shortages in industrialised countries, leading to higher labour productivity. However, India, with its surplus labour, lacks the incentive for widespread investment in such technologies. There is a need to offer incentives for foreign investment in low-tech manufacturing to generate employment for the rural and urban poor. However, this raises questions about the feasibility and attractiveness of low-tech manufacturing investments in India, given the historical lack of significant foreign investment in this area.
Addressing India’s low labour productivity requires a multifaceted approach. Revamping the education and skilling ecosystem is essential. This involves aligning educational curricula with industry needs, promoting vocational training, and enhancing the employability of graduates. Collaboration between educational institutions and industries can ensure that the workforce possesses relevant and practical skills. Encouraging investment in productivity-enhancing technologies is crucial. The government can play a role by providing incentives for adopting advanced technologies, particularly in labour-intensive sectors. Public-private partnerships can facilitate the transfer of technology and expertise. Implementing comprehensive labour market reforms can address structural issues. A unified and accepted labour code can provide a stable and predictable regulatory environment, encouraging investment and improving labour conditions.
While high-skill sectors like IT have driven growth, there is a need to focus on traditional labour-intensive sectors such as manufacturing and agriculture. Policies and initiatives should aim to modernise these sectors, improve productivity, and create sustainable employment opportunities. Creating a conducive environment for foreign investment in low-tech manufacturing can boost employment and productivity. This involves addressing regulatory hurdles, providing infrastructure, and offering incentives to attract foreign investors.
Enhancing the bargaining power of the workforce through trade unions and collective bargaining can ensure that productivity gains translate into higher wages. Policies should aim to balance the interests of employers and employees, promoting fair wages and improved working conditions. Tailored strategies for different sectors can address their unique challenges and opportunities. For instance, promoting value-added manufacturing, improving supply chain efficiency, and enhancing market access for small producers can boost productivity in specific industries.
India’s low labour productivity is a complex issue that requires a holistic and coordinated approach. By addressing the root causes, promoting technological advancements, and implementing comprehensive labour market reforms, India can enhance its competitiveness and achieve sustainable economic growth. Policymakers, industry leaders, and stakeholders must collaborate to create an environment that fosters productivity, innovation, and inclusive growth. Only then can India realise its vision of becoming a developed nation by 2047.
Role of policy and structural reforms
In addition to these measures, policy and structural reforms are vital to addressing low labour productivity. The government must focus on creating a business-friendly environment that encourages entrepreneurship and innovation. Simplifying regulatory procedures, reducing bureaucratic hurdles, and providing tax incentives can stimulate investment in productivity-enhancing technologies and processes. Furthermore, investing in infrastructure development, such as transportation, logistics, and digital connectivity, can improve the efficiency of supply chains and enhance overall productivity.
India’s social hierarchies and cultural factors also play a role in labour productivity. Addressing these issues requires promoting social inclusion and equity in the workforce. Encouraging diversity and equal opportunities can lead to a more motivated and productive workforce. Additionally, addressing health and safety concerns, providing better working conditions, and ensuring fair wages can improve the overall well-being of workers, leading to higher productivity.
Finally, a strong focus on research and development (R&D) is essential for driving innovation and productivity. The government should increase funding for R&D initiatives and encourage collaboration between academic institutions, industries, and research organisations. By fostering a culture of innovation and continuous improvement, India can develop new technologies and processes that enhance labour productivity across various sectors.
India’s low labour productivity is a complex challenge that requires a comprehensive and coordinated approach. By addressing the root causes, implementing policy and structural reforms, promoting technological advancements, and fostering social inclusion and equity, India can enhance its competitiveness and achieve sustainable economic growth. Policymakers, industry leaders, and stakeholders must work together to create an environment that fosters productivity, innovation, and inclusive growth. With concerted efforts, India can realise its vision of becoming a developed nation by 2047, ensuring a better future for all its citizens.