Growth and Productivity in 21st Century India: A Disaggregated Industry Level Analysis

Transcription

1 Fifth World KLEMS Conference, June , Harvard University Growth and Productivity in 21st Century India: A Disaggregated Industry Level Analysis KL Krishna Deb Kusum Das Pilu Chandra Das June, 2018 The study has been supported through a research grant from Reserve Bank of India Factor accumulation had driven growth in Indian economy in 21 st century, however, TFPG also played a significant role

2 Content India KLEMS database 2017 Broad sector analysis Disaggregated Industry Level analysis Challenges to TFP growth improvement Conclusion 2

3 Growth and Productivity India KLEMS Database

4 The database underlying the computation of productivity and sources of growth is the India KLEMS dataset (version 2017) Sources: It is compiled from National Accounts Statistics (NAS), published annually by the Central Statistical Organization, Government of India and supplemented by Input-Output tables, Annual Survey of Industries & National Sample Survey Organizations (NSSO) surveys on employment & unemployment. Variables: The dataset provides consistent estimates of factors of production namely capital(k), labour (L),energy(E), material(m), and services (S) along with both labor as well as total factor productivity (TFP) for 27 industries. Time period & industry coverage: Since the focus of the present study is 21st century India, we cover the period till The disaggregated 27 sectors include agriculture, mining and quarrying, along with 13 manufacturing industries and several service sectors including transport and storage, telecommunication, financial services. Together they account for the total value added of the Indian economy. Labour input: It is measured by combining data on labour persons and data on labour quality as in the KLEMS framework it is desirable to estimate changes in labour composition by industries on the basis of age, gender and education. Capital input: For capital input, we compute the measure of capital services from the measurement of capital services. We have used capital stock estimates for detailed asset types and the shares of each of these assets in total capital remuneration. The intermediate inputs: They are comprise- Energy input (E), Material input (M) and services input (S) and we have constructed the volume series of intermediate input for each of these categories. The key building block for constructing time series on Intermediate Inputs at current prices is the input-output transaction tables. Factor income: To compute the labor income share out of value added, the sum of the compensation of employees and that part of the mixed income which are wages for labor have been taken into account. Results: Using the above mentioned variables annual growth rates of labour productivity and TFP for the 27 industries are computed for the period to Both the indexes and growth rates of LP and TFP are computed with as base year. 4

5 Growth and Productivity Broad sectors 5

6 The gradual reform of 1990s and benign global economy drove Indian economy into a higher growth path as it enters 21 st century GDP growth: Trend Component (%) GDP growth: Cyclical component (%) India China World India China World India s long-term trend growth of GDP accelerated after and reached its peak in , the gradual reform of 1990s and benign global growth before financial crisis of helped The growth experience of 21 st century had two distinct phase In phase I ( to ) India s growth moved in sync with World Growth and enjoyed buoyant Global growth impetus In phase II ( to ), India has gone through a cycle where domestic factors influenced more to the cyclical downturn, the cycle has started to revise in last few years Note: India s data are in Financial Year basis, GDP growth has been split into trend and cyclical component using HP filter Source: IMF WEO database April,2018, India KLEMS Database

7 Capital deepening remained the dominant sources of growth in India GVA growth in 21 st century but its composition changed favourably Sources of Gross Value Added growth (% per annum) TFPG Capital Composition Capital stock Labour Quality Labour Person Following historical trend capital deepening was the most dominant factor in Indian economic growth even in the 21 st century, but there has been some change in composition India s Gross Value added growth since has been majorly driven by capital accumulation, the contribution of capital increased from 49% to 57% when compared in two phases. One third of the growth also came from growth in TFP but its contribution fell in the second half after The asset composition of capital input changed and its contribution increased in second half of the reference period Even though labour quality contribution did not changed between the two phases, there has been a sharp fall in labour person growth. Source: India KLEMS Database

8 Gross output growth was driven mainly by intermediate input, services sector had significant contribution from TFP growth Sources of growth of Gross Output: Broad Sectors (% per annum, ) (% per annum, ) Labour Intensive Manufacturing Labour Input Capital Input Construction Market Services Non-Labour Intensive Manufacturing Total Manufacturing Total Services Mining Non-Market Services Electricity Agriculture Intermediate Input TFPG Intermediate input played the major role in growth of Gross Output in Indian economy, mainly for manufacturing and construction. Construction which was growing at 11% in the phase I was driven by mainly labour and intermediate input, but TFP growth contribution was negative. Contrary to believe, Market services growth in gross output had significant contribution from TFP growth TFP growth contribution improved in labour intensive manufacturing in phase II. Source: India KLEMS Database

9 Labour productivity grew more than twice the pace of TFP growth, driven by labour intensive manufacturing and market services Labour and Total Factor Productivity Growth ( =100, Total Economy) Labour Productivity growth: Broad Sectors (% per annum) Agriculture Mining Manufacturing Labour Intensive Non-Labour Intensive Electricity Construction Services Market Services Labour Productivity Growth TFP growth Non-Market Services Labour Productivity grew more than twice the pace of Total Factor productivity since Comparing across the phases, all the sectors except Non-labour intensive manufacturing and construction saw labour productivity grew faster in second half Across all sectors, labour intensive manufacturing and market services experience fastest growth Source: India KLEMS Database

10 Labour quality improvement has insignificant role, capital and intermediate input drove labour productivity growth since Sources of growth of labour productivity (% per annum, ) Labour Intensive Manufacturing Market Services Total Manufacturing Total Services Electricity Mining Non-Labour Intensive Manufacturing Agriculture Non-Market Services Construction Labour Quality Capital Service per employed Intermediate Input per employed TFP Growth The sources of the rapid growth in labour productivity was mainly driven by growth in either capital services per employed or use of more intermediate input Increase in labour quality had insignificant contribution in growth in labour productivity Manufacturing labour productivity growth was majorly because of large contribution of intermediate input consumption per employed Whereas in case of services, the contribution of capital services, intermediate input per employed played balanced role On an average 10% of the labour productivity growth came from increase in TFP growth exception being Mining and Construction sector where TFP growth contributed negatively Source: India KLEMS Database

11 Material input consumption had driven higher share of intermediate consumption in manufacturing and construction Contribution of Intermediate input to GVO growth (% per annum, ) Labour Intensive Manufacturing Total Manufacturing Non-Labour Intensive Manufacturing Construction Market Services Electricity Mining Total Services Non-Market Services Agriculture Material Energy Services The higher contribution of intermediate inputs in manufacturing and construction was mainly because of large share of material inputs. Material input contribution was almost 4 times higher in manufacturing and construction compared to services sector. Services as input also played significant role in manufacturing sector, where 1/5 th of the intermediate contribution in labour intensive manufacturing was from services Besides electricity and mining which are traditionally energy intensive, Market services had relatively high share of energy input consumption Similarly construction sector had 27% of services input contributing to the intermediate contribution Source: India KLEMS Database

12 Growth and Productivity Disaggregated Industry Level 12

13 Post & Telcom(64) Other Manu(36t37) Transport Eq(34t35) Paper(21t22) Rubber(25) Basic Metal(27t28) Chemical(24) Textile & Leather(17t19) Food(15t16) Utilities(E) PAD(L) Hotels(H) Mining(C) Wood(20) Agriculture(AtB) Intermediate input and capital deepening drove output growth in Indian economy, however some market services had very high TFPG Source: India KLEMS Database 2017 Sources of Gross Output Growth: 27 India KLEMS sector (% per annum ) TFPG GVA share (%) -4 Trade(G) Others serv(70+o+p) Health(N) Education (M) Non-metallic(26) Transport(60t63) Construction(F) Refined(23) Machinery nec(29) Electrical Eq(30t33) Financial(J) Business(71t74) Note: The code inside the parenthesis indicate industry code Intermediate Input Capital Input Labour Input Market services comprising mainly Post & Telecom, Business and Financial services experienced very high output growth since driven by TFPG and intermediate input growth. Business and Financial services and construction had high labour input contribution There is clear sign of very high contribution of intermediate input consumption across all sectors except domestic trade, mining and agriculture Domestic trade, mining and agriculture s output growth was driven by capital deepening 13

14 Other Manu(36t37) Post & Telcom(64) Paper(21t22) Chemical(24) Textile & Leather(17t19) Transport Eq(34t35) Basic Metal(27t28) Food(15t16) PAD(L) Wood(20) Utilities(E) Hotels(H) Post & Telecom sector had the highest labour productivity growth since , followed by other manufacturing, paper and textile and leather Labour Productivity Growth: 27 India KLEMS sector (% per annum ) Trade(G) Agriculture Mining Manufacturing Utilities Construction Services Agriculture(AtB) Construction(F) Machinery nec(29) Non-metallic(26) Transport(60t63) Education (M) Rubber(25) Others serv(70+o+p) Business(71t74) Health(N) Electrical Eq(30t33) Refined(23) Financial(J) Mining(C) 2015 GVA share (%) Post & Telecom sector which experience large technological progress in 21 st century experience 17% of labour productivity growth. In terms of top 5 industries we note that apart from post & telecom, other manufacturing, paper, chemicals and textiles are the industries with high rates of improvements in labour productivity. Among major sectors in terms of their GVA share in 2015, Domestic trade (wholesale+ retail) emerged as an sector which had relatively high Labour productivity growth Note: The code inside the parenthesis indicate industry code Source: India KLEMS Database

15 Paper(21t22) Chemical(24) Textile & Leather(17t19) Health(N) Trade(G) Basic Metal(27t28) Utilities(E) Financial(J) Refined(23) Business(71t74) Non-metallic(26) Agriculture(AtB) Barring few services sectors, labour productivity growth was driven by consumption of more capital and intermediate input per employed Other Manu(36t37) Post & Telcom(64) Sources of Labour Productivity Growth: 27 India KLEMS sector (% per annum ) Food(15t16) TFPG Intermediate Input/employed Mining(C) Transport Eq(34t35) PAD(L) Wood(20) Rubber(25) Transport(60t63) Capital Service/employed Labour Quality Machinery nec(29) 2015 GVA share (%) Education (M) Others serv(70+o+p) Construction(F) Hotels(H) Electrical Eq(30t33) The growth in Post & telecom labour productivity was mainly driven by TFPG The other services sector which show significant contribution of TFPG to labour productivity was Financial services, Public Administration and defense and transport. Domestic trade which we highlighted as major sector in the economy actually had TFPG negatively impacting labour productivity growth and its was capital deepening per employed which contributed significantly. Note: The code inside the parenthesis indicate industry code Source: India KLEMS Database

16 Paper(21t22) Chemical(24) Textile & Leather(17t19) Transport Eq(34t35) Other Manu(36t37) Post & Telcom(64) Hotels(H) PAD(L) Food(15t16) Utilities(E) Basic Metal(27t28) Wood(20) Market services experienced relatively high TFPG since ,Post & Telecom and Financial services were the best performer Financial(J) Electrical Eq(30t33) TFP Growth: 27 India KLEMS sector (% per annum ) Agriculture Mining Manufacturing Utilities Construction Services Agriculture(AtB) Machinery nec(29) Rubber(25) Non-metallic(26) Refined(23) Others serv(70+o+p) 2015 GVA share (%) Trade(G) Health(N) Education (M) Mining(C) Construction(F) As highlighted earlier, Post & Telecom and Financial services were the two major sectors which experienced unprecedented TFP growth in 21 st century It is very clear that there was a significant difference between TFP growth in market services vs non-market services, the former experiencing positive TFPG since In manufacturing sector, except basic metals, all other manufacturing industries experience positive TFPG but less than 2%. Business(71t74) Transport(60t63) Note: The code inside the parenthesis indicate industry code Source: India KLEMS Database

17 TFPG (%) TFPG fell in the second phase ( ) except few sectors like Financial & Business services, public administration, Food and Textile TFP Growth in 2 phases: 27 India KLEMS sector (% per annum) Textile & Leather Other Manu Business services Food Chemical Education Wood Mining Rubber Basic Metal Agriculture Trade Electrical Eq Paper Transport Transport Eq Refined Utilities Hotels Post & Telcom Others serv Construction Source: India KLEMS Database 2017 Non-metallic Health Financial services Public Administration & Defense Machinery nec Agriculture Mining Manufacturing Utilities Construction Services Size of the bubble represent GVA share in 2015 TFPG (%) Comparing phase I ( ) and phase II ( , Post & Telecom sector s TFPG slowed down after 2007 Whereas for Financial services sector, TFPG improved in the second phase Utilities and domestic trade sector which experience positive TFPG during , their TFPG fell to negative in Within manufacturing Food and Textile & leather sector experience higher TFPG in second phase whereas all other manufacturing sector s TFPG fell in second half 17

18 Services sectors Manufacturing sectors Material input consumption dominates the contribution among intermediate input to output growth, but its share is smaller in services Contribution of Intermediate input to GVO growth (% share in intermediate input contribution, ) Agriculture(AtB) Mining(C) Food(15t16) Textile & Leather(17t19) Wood(20) Paper(21t22) Refined(23) Chemical(24) Rubber(25) Non-metallic(26) Basic Metal(27t28) Machinery nec(29) Electrical Eq(30t33) Transport Eq(34t35) Other Manu(36t37) Utilities(E) Construction(F) Trade(G) Hotels(H) Transport(60t63) Post & Telcom(64) Financial(J) Business(71t74) PAD(L) Education (M) Health(N) Others serv(70+o+p) Relatively manufacturing sector industries had higher contribution of material input to Gross Output Three services sector, Hotels, post & telecom and health had comparatively higher material input contribution. Within manufacturing sector, nonmetallic and Basic metal had high contribution of energy along with mining, utilities and transport sectors. In services, both financial and business services had relatively higher energy intensity compared to other services sector Agriculture sector which is very material intensive, also uses services as its core input Material Input Energy Input Services Input Note: The code inside the parenthesis indicate industry code Source: India KLEMS Database

19 Growth and Productivity Challenges to TFP growth improvement 19

20 Presence of informal segment (75% in employment) in Indian manufacturing create challenges for improvement in productivity growth TFP growth: Indian manufacturing segments ( , % per annum, GO basis) TFP growth: Disaggregated Manufacturing sectors ( , % per annum, GO basis) Electrical Eq(30t33) Refined(23) Machinery nec(29) Chemical(24) Rubber(25) Textile & Leather(17t19) Paper(21t22) Transport Eq(34t35) Food(15t16) Non-metallic(26) Wood(20) Formal Informal Other Manu(36t37) Basic Metal(27t28) Formal Informal Formal manufacturing sector TFPG during was almost double what was observed in informal segment The difference in TFPG difference is observed across almost all the manufacturing sectors The difference seems to less for industries where there both formal and informal segment coexist with interconnected production system through sub-contracting-for example in Textile and Leather manufacturing Source: India KLEMS Database

21 TFPG (%) Level of education has positive impact on productivity growth, however education attainment is yet to make the structural shift TFP growth vs Education attainment (For all 27 India KLEMS industries) Category of education level across industries (2011, % share) Education Financial Construction Health PAD Basic Metal Post & Telcom Electrical Eq Chemical Transport Eq Textile & Leather Paper Transport Business Rubber Food Utilities Refined Agriculture Machinery nec Other Manu Non-metallic Others serv Hotels Mining Wood Trade Between Primary and High Secondary (% share in employed,2011) The fit is best with % share of employed between primary and higher secondary, compared to share of above higher secondary Agriculture(AtB) Mining(C) Food(15t16) Textile & Leather(17t19) Wood(20) Paper(21t22) Refined(23) Chemical(24) Rubber(25) Non-metallic(26) Basic Metal(27t28) Machinery nec(29) Electrical Eq(30t33) Transport Eq(34t35) Other Manu(36t37) Utilities(E) Construction(F) Trade(G) Hotels(H) Transport(60t63) Post & Telcom(64) Financial(J) Business(71t74) PAD(L) Education (M) Health(N) Others serv(70+o+p) <= Primary Primary-higher Secondary +Higher Secondary Source: India KLEMS Database

22 Growth during Nature of factor accumulation depends on evolution of labour regulation and structure of changing capital asset types 350 Type of employment in Organised Manufacturing (2000=100) 30 Growth of Equipment (% per annum) Post & Telcom Trade Others serv Business Employed through Contractors Directly Employed Refined Health Machinery nec Agriculture Utilities Basic Metal Transport Eq Mining Construction Hotels Rubber Non-metallic Education Financial Food Chemical PAD Wood Textile & Leather Transport Electrical Eq Other Manu Paper Growth during Since , there has been sharp increase in contractualisation of Indian labour market especially Indian manufacturing sector, the impact of productivity is still not clear The phase I ( ) saw shift towards increase share of equipment in capital stock which should positively impact TFPG, growth of which decelerated in second phase II. Source: India KLEMS Database

23 Growth and Productivity Conclusion 23

24 India s growth has been driven by factor accumulation, productivity growth has been also relatively high, but yet to reach potential Structural shift in 21 st century: Indian economy entered a much higher growth trajectory after , but there exist two phases separated by financial crisis. Factor accumulation main driver: Growth in gross value added was driven by capital deepening and intermediate input played major role in gross output growth. Labour productivity sharply accelerated: Even though contribution of labour input remained very small, labour productivity growth rose sharply owing to use of more intermediate and capital input. Market services emerged as best performer: Market services experienced relatively high TFPG since ,Post & Telecom and Financial services were the best performer. Material consumption is very high: Material input consumption dominates the contribution among intermediate input to output growth, but its share is smaller in services. Challenges to productivity improvement: Presence of informal segment in Indian economy, labour market regulation, distorted factor input both in terms of labour and capital assets and backlog in educational attainment hold back India s productivity potential. 24