India’s total factor productivity (TFP) growth has seen a moderate decline compared to the global experience, though it remains above that of emerging markets and developing economies, according to a recent report.

What is Total factor productivity (TFP)?

• Productivity levels measure the relationship between total products or output, and inputs or factors of production employed.
• Labour productivity is a measure of total output divided by the units of labour employed in the process of production.
• However, TFP is a measure of total output divided by a weighted average of inputs; i.e., labour and capital.
• Improvements in TFP bring down production costs, raise output levels, and lead to a higher gross domestic product.
• While total productivity measures all-inclusive productivity, TFP is a measure of production efficiency.

How has India fared thus far?

• A recent Reserve Bank of India (RBI) report points to a moderate decline in TFP growth compared to the global experience.
• TFP growth rate for India during the 2010-2019 period was approximately 2.2%, as against -0.3% for emerging markets and developing economies.
• During the pandemic, the TFP for India declined by 2.9% in 2020 and marginally improved by 0.1% in 2021.
• In 2022, TFP growth rate is projected to increase to 2%.
• As per estimates, TFP growth contributed to 30% of India’s GDP growth during 2010-2018.
• It was largely driven by public administration, quality education and social works.

What has been the TFP trend across the world?

• Global productivity growth has witnessed a prolonged slowdown since 2010, with the deceleration sharper in emerging and developing economies.
• This is ascribed to a weakening investment climate, and lower employment growth levels in developed economies, among others.
• TFP growth for the world economy was 0.7% in 2021 and may shrink by 0.5% in 2022.

What are the ways to improve TFP?

• India’s initiatives around skill development and the new education policy are steps in the right direction, since they focus on boosting manpower employability.
• Quality education, better healthcare, nurturing of innovation, introduction of efficient technology and processes in domestic companies and reduction in misallocation of resources can help improve TFP levels.
• Though the country’s ranking in the Global Innovation Index, 2021 has improved to 46, it still has some distance to go.

How can the industry improve productivity?

• Improved TFP minimizes per-unit cost facilitating the horizontal expansion of consumption demand, thereby improving the standard of living.
• Employers have fortunately started acknowledging the fact that manpower is an essential component in profit earnings.
• Today, the focus has shifted to retaining talent, which is limited in supply.
• This positive transformation seen after the pandemic needs to be further extended.

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