Labouring over

Among economic data that is attracting notice these days is India’s productivity growth, which has risen to nearly 3.5, China’s long-run average. Economists are unanimous this sharp increase has come from trade liberalisation, a pro-business environment, industrial liberalisation and a reallocation of resources. India today uses capital more efficiently than China — for every additional unit of output produced it requires less capital than China does. Individual enterprise, the dismantling of a state dominated manufacturing system and a history of entrepreneurship are acting in India’s advantage.

The question though is whether India’s high productivity growth be sustained? Labour moving from low to high productivity jobs is typically a crucial factor. Here there is huge untapped potential: employment in low-productivity agriculture is high (at 57 percent of total employment, compared to 47 per cent in China and 34 per cent in Asia). It is striking that non-agriculture labour productivity is 45 times that in agriculture. Higher labour to capital ratios in non-agriculture ensure that when labour shifts from agriculture to non-agriculture, productivity and GDP growth rise.

But the pace of labour shifting away from agriculture in India is very unsatisfactory. It has been slower in India than in other Asian countries. Between 1980 and 2000, the employment share of the even the highly productive service sector has remained nearly flat and lower than in Asian economies. Labour laws are a well identified problem. These have prevented a rise in industrial employment. Next set of inhibiting factors are infrastructure policies relating to power, electricity and urban planning. No less important are the political problems related to land use and the political discourse on the benefits of industrialisation. There’s an irony here. Thanks to restrictive labour laws, industry has failed to provide high quality jobs to large numbers. So in popular discourse industry is often viewed as a force for taking away livelihoods, not generating employment. Politicians exploit this. India’s productivity trend and therefore medium-term growth trend is ultimately a political issue.