growth and productivity in 21st century india: a

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

Fifth World KLEMS Conference, June 04-05 2018, Harvard University

Factor accumulation had driven growth in Indian economy in 21st 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

1

2

3

4

5

3

Growth and Productivity

India KLEMS Database 2017

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

2000-01 till 2015-16. 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 2000-01 to 2015-16. Both the indexes and growth rates of LP and TFP are

computed with 2011-12 as base year.

5


Broad sectors

6

The gradual reform of 1990s and benign global economy drove Indian

economy into a higher growth path as it enters 21st century

Source: IMF WEO database April,2018, India KLEMS Database 2018

Note: India’s data are in Financial Year basis, GDP growth has been split into trend and cyclical component using HP filter

0

2

4

6

8

10

12

80 85 90 95 00 05 10 15

India China World

-5

-4

-3

-2

-1

0

1

2

3

4

5

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

India China World

India’s long-term trend growth of GDP accelerated after 2000-01 and reached its peak in 2007-08,

the gradual reform of 1990s and benign global growth before financial crisis of 2008-09 helped

The growth experience of 21st century had two distinct phase

In phase I (2000-01 to 2007-08) India’s growth moved in sync with World Growth and enjoyed

buoyant Global growth impetus

In phase II (2008-09 to 2015-16), 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

GDP growth: Trend Component

(%)

GDP growth: Cyclical component

(%)

7

Capital deepening remained the dominant sources of growth in India

GVA growth in 21st century but its composition changed favourably

Source: India KLEMS Database 2018

Note: Year denote Financial year

Sources of Gross Value Added growth

(% per annum)

0.6 0.8

0.3

0.4

0.4

0.4

3.6

3.6

3.6

0.2 0.1

0.3

2.5

2.7

2.3

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2000-2015 2000-2007 2008-2015

TFPG

Capital Composition

Capital stock

Labour Quality

Labour Person

7.2

7.6

6.9

Following historical trend capital

deepening was the most dominant factor

in Indian economic growth even in the

21st century, but there has been some

change in composition

India’s Gross Value added growth since

2000-01 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 2007-08.

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.

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

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.

-5 0 5 10 15

Agriculture

Electricity

Non-Market Services

Mining

Total Services

Labour Intensive Manufacturing

Total Manufacturing

Non-Labour Intensive Manufacturing

Market Services

Construction

Labour Input

Capital Input

Intermediate Input

TFPG -5 0 5 10 15

(% per annum, 2000-2007) (% per annum, 2008-2015)

-6 -4 -2 0 2 4 6 8 10

Non-Market Services

Market Services

Services

Construction

Electricity

Non-Labour Intensive

Labour Intensive

Manufacturing

Mining

Agriculture 2000-2007

2008-2015

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

(2000-01=100, Total Economy)

Labour Productivity growth: Broad Sectors

(% per annum)

0

50

100

150

200

250

300

2000 2003 2006 2009 2012 2015

Labour Productivity Growth TFP growth

Labour Productivity grew more than twice the pace of Total Factor productivity since 2000-01

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

10

Labour quality improvement has insignificant role, capital and

intermediate input drove labour productivity growth since 2000-01



Sources of growth of labour productivity

(% per annum, 2000-2015)

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.

-4 -2 0 2 4 6 8

Construction

Non-Market Services

Agriculture


Mining

Electricity

Total Services

Total Manufacturing

Market Services


Labour Quality

Capital Service per employed

Intermediate Input per employed

TFP Growth

11

Material input consumption had driven higher share of intermediate

consumption in manufacturing and construction



Contribution of Intermediate input to GVO growth

(% per annum, 2000-2015)

0 1 2 3 4 5 6 7

Agriculture

Non-Market Services

Total Services

Mining

Electricity

Market Services

Construction


Total Manufacturing


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 1/5th 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

12


Disaggregated Industry Level

13

Intermediate input and capital deepening drove output growth in Indian

economy, however some market services had very high TFPG


Sources of Gross Output Growth: 27 India KLEMS sector

(% per annum 2000-2015)

90 70 30 25

18

65 80

16

10

5

14

95 55

4

0

0 60 50

6

12

-2

-4

45 100 15 40 20

8

35

2

75 85 10

Agriculture

(AtB

)

Wood(2

0)

Rubber(

25)

Non-metallic(26) Basic

Meta

l(27t2

8)

Machinery nec(29)

Others serv(70+O+P)

Electrical Eq(30t33)

Paper(

21t2

2)

Financial(J)

Tra

nsport

Eq(3

4t3

5)

Oth

er

Manu(3

6t3

7)

Health(N)

Refined(23)

Fo

od(1

5t1

6)

Utilit

ies(E

)

Business(71t74)

Transport(60t63)

Trade(G)

Min

ing(C

)

Construction(F)

PA

D(L

)

Hote

ls(H

)

Te

xtile

& L

eath

er(

17t1

9)

Post &

Te

lcom

(64)

Education (M)

Chem

ical(24)

2015 GVA share (%)

Note: The code inside the parenthesis indicate industry code

Market services

comprising mainly Post &

Telecom, Business and

Financial services

experienced very high

output growth since 2000-

01 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

Intermediate Input

TFPG Capital Input

Labour Input


14

Post & Telecom sector had the highest labour productivity growth since

2000-01, followed by other manufacturing, paper and textile and leather

Labour Productivity Growth: 27 India KLEMS sector

(% per annum 2000-2015)

10

3

-1

0

15

2

1

13

4

20

5

6

15

25

7

35

8

45

9

14

10

11

60 65

12

90

16

80

17

85 95 100 55 30 40 70 75 50 0 5

Construction(F)

Financial(J) H

ote

ls(H

)

Rubber(25)

Wood(2

0)

Utilit

ies(E

)

Basic

Meta

l(27t2

8)

Fo

od(1

5t1

6)

Paper(

21t2

2)

Non-metallic(26) PA

D(L

)

Te

xtile

& L

eath

er(

17t1

9)

Post &

Te

lcom

(64)

Education (M)

Machinery nec(29) Trade(G)

Mining(C)

Agriculture(AtB)

Others serv(70+O+P)

Refined(23)

Oth

er

Manu(3

6t3

7)

Health(N)

Transport(60t63)

Chem

ical(24)

Tra

nsport

Eq(3

4t3

5)

Electrical Eq(30t33) Business(71t74)

Agriculture

Mining

Manufacturing Utilities

Construction

Services

2015 GVA share (%)


Post & Telecom sector

which experience large

technological progress in

21st 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



15

Barring few services sectors, labour productivity growth was driven by

consumption of more capital and intermediate input per employed

Sources of Labour Productivity Growth: 27 India KLEMS sector

(% per annum 2000-2015)

10 95 70 20 0 5

-2

14

85

6

80 100 90 40

16

35

0

60

-4

8

18

50

12

15 75 45

10

25 55

2

65

4

30

Transport Eq(34t35) Wood(20)

Hotels(H)

Health(N

)

Oth

er

Manu(3

6t3

7) P

ost &

Te

lcom

(64)


Others serv(70+O+P) Basic

Meta

l(27t2

8)

Rubber(25)

Tra

de(G

)

Education (M)

Te

xtile

& L

eath

er(

17t1

9)

Construction(F)

PAD(L)

Paper(

21t2

2)

Transport(60t63)

Refin

ed(2

3)

Food(15t16)

Non-m

eta

llic(2

6)

Mining(C)

Agriculture

(AtB

)

Busin

ess(7

1t7

4)

Fin

ancia

l(J)

Machinery nec(29)

Utilit

ies(E

)

Chem

ical(24)

2015 GVA share (%)


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.

TFPG

Intermediate Input/employed

Capital Service/employed

Labour Quality



16

Market services experienced relatively high TFPG since 2000-01,Post

& Telecom and Financial services were the best performer

TFP Growth: 27 India KLEMS sector

(% per annum 2000-2015)

65 20

9

55 25

5

30 35 40

4

75 45

1

50

3

-1 60 70 80 85 90 100

0

8

6

7

10

2

0 5

-3

-2

15 95 10

Te

xtile

& L

eath

er(

17t1

9)

Refined(23)

Financial(J) Rubber(25)

Transport(60t63)

Hote

ls(H

)

Oth

er

Manu(3

6t3

7)

Utilit

ies(E

)

Machinery nec(29)

Tra

nsport

Eq(3

4t3

5)

Agriculture(AtB) Education (M)

Basic

Meta

l(27t2

8)

Others serv(70+O+P)

Paper(

21t2

2)

Post &

Te

lcom

(64)

PA

D(L

)

Construction(F)

Chem

ical(24)

Trade(G) W

ood(2

0)

Fo

od(1

5t1

6)

Health(N) Mining(C)

Business(71t74)


Non-metallic(26)

Agriculture

Mining

Manufacturing Utilities

Construction

Services

2015 GVA share (%)


As highlighted earlier,

Post & Telecom and

Financial services were

the two major sectors

which experienced

unprecedented TFP

growth in 21st 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 2000-

01.

In manufacturing sector,

except basic metals, all

other manufacturing

industries experience

positive TFPG but less

than 2%.



17

TFPG fell in the second phase (2008-2015) except few sectors like

Financial & Business services, public administration, Food and Textile

TFP Growth in 2 phases: 27 India KLEMS sector

(% per annum)

Comparing phase I (2000-

2007) and phase II (2008-

2015, 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 2000-2007, their

TFPG fell to negative in

2008-2015.

Within manufacturing

Food and Textile & leather

sector experience higher

TFPG in second phase

whereas all other

manufacturing sector’s

TFPG fell in second half

-4.5

-3.0

-1.5

0.0

1.5

3.0

4.5

6.0

7.5

-6 -4 -2 0 2 4 6 8 10 12 14

Trade

Textile & Leather

Electrical Eq

Agriculture

Mining

Wood

Food

Transport Eq

Paper

Refined

Rubber

Chemical Business services

Post & Telcom

Basic Metal

Utilities

Other Manu

Hotels

Construction

Transport

Financial services

Non-metallic

Public Administration & Defense

Education

Others serv

Machinery nec

Health

Mining

Agriculture

Manufacturing

Utilities

Construction

Services

TFPG 2000-2007 (%)

TF

PG

2008-2

015 (

%)

Size of the bubble

represent GVA

share in 2015



18

Material input consumption dominates the contribution among

intermediate input to output growth, but its share is smaller in services


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, non-

metallic 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.


Contribution of Intermediate input to GVO growth

(% share in intermediate input contribution, 2000-2015)

-20 0 20 40 60 80 100 120

Others serv(70+O+P) Health(N)

Education (M) PAD(L)

Business(71t74) Financial(J)

Post & Telcom(64) Transport(60t63)

Hotels(H) Trade(G)

Construction(F) Utilities(E)

Other Manu(36t37) Transport Eq(34t35) Electrical Eq(30t33) Machinery nec(29) Basic Metal(27t28)

Non-metallic(26) Rubber(25)

Chemical(24) Refined(23)

Paper(21t22) Wood(20)

Textile & Leather(17t19) Food(15t16)

Mining(C) Agriculture(AtB)

Material Input Energy Input Services Input

Man

ufa

ctu

rin

g s

ecto

rs

Serv

ices s

ecto

rs


19


Challenges to TFP growth improvement

20

Presence of informal segment (75% in employment) in Indian

manufacturing create challenges for improvement in productivity growth



TFP growth: Indian manufacturing segments

(2003-2011, % per annum, GO basis)

6.2

3.1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Formal Informal -3 -2 -1 0 1 2 3 4

Basic Metal(27t28)

Other Manu(36t37)

Wood(20)

Non-metallic(26)

Food(15t16)

Transport Eq(34t35)

Paper(21t22)

Textile & Leather(17t19)

Rubber(25)

Chemical(24)

Machinery nec(29)

Refined(23)


Formal

Informal

TFP growth: Disaggregated Manufacturing sectors

(2003-2011, % per annum, GO basis)

Formal manufacturing

sector TFPG during 2003-

2011 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

0 20 40 60 80 100

Others serv(70+O+P)

Health(N)

Education (M)

PAD(L)

Business(71t74)

Financial(J)

Post & Telcom(64)

Transport(60t63)

Hotels(H)

Trade(G)

Construction(F)

Utilities(E)

Other Manu(36t37)

Transport Eq(34t35)


Machinery nec(29)

Basic Metal(27t28)

Non-metallic(26)

Rubber(25)

Chemical(24)

Refined(23)

Paper(21t22)

Wood(20)

Textile & Leather(17t19)

Food(15t16)

Mining(C)

Agriculture(AtB)

<= Primary Primary-higher Secondary +Higher Secondary

21

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)

The fit is best with % share of employed between

primary and higher secondary, compared to

share of above higher secondary

20 25 30 35 40 45 50 55 60

4.0

2.5

-2.0

10.0

0.5

-1.0

-2.5

-0.5

-1.5

1.0

0.0

1.5

3.5

2.0

3.0

4.5

Education

Textile & Leather

Basic Metal

Transport Eq

Utilities

Post & Telcom

Transport

Rubber

Agriculture

Health

Construction

PAD

Paper

Refined

Non-metallic Machinery nec

Others serv

Electrical Eq

Wood Trade

Hotels

Financial

Business

Chemical

Mining

Food

Other Manu

Between Primary and High Secondary

(% share in employed,2011)

TF

PG

2000-2

015 (

%)


22

Nature of factor accumulation depends on evolution of labour regulation

and structure of changing capital asset types


Type of employment in Organised Manufacturing

(2000=100) Growth of Equipment

(% per annum)

0

50

100

150

200

250

300

350

2000 2002 2004 2006 2008 2010 2012 2014

Employed through Contractors Directly Employed

0

5

10

15

20

25

30

0 5 10 15 20 25 30

Mining Hotels

Construction

Post & Telcom

Food

Wood

Paper

Rubber

Transport Eq

Machinery nec

Education

Electrical Eq

Utilities

Trade

Financial

PAD

Others serv

Refined

Business

Transport

Chemical

Other Manu

Textile & Leather

Agriculture

Health

Non-metallic

Basic Metal

Growth during 2000-2007

Gro

wth

during 2

008

-2015

Since 2000-01, 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 (2000-2007) saw shift towards increase share of equipment in capital stock which should

positively impact TFPG, growth of which decelerated in second phase II.


23


Conclusion

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 21st century: Indian economy entered a much higher growth

trajectory after 2000-01, 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 2000-01,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.

growth and productivity in 21st century india: a

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