Question - "Economic growth in the recent past has been led by increase in labour productivity." Explain this statement. Suggest the growth pattern that will lead to creation of more jobs without compromising labour productivity. UPSC CSE 2022 Main GS Paper 3
Answer
This statement means that the economic growth in the recent past has been driven by an increase in the output per worker or per hour worked in the economy. Labour productivity is a measure of how efficiently labour is used to produce goods and services. It is calculated by dividing the real gross domestic product (GDP) by the total number of workers or total hours worked in the economy. Labour productivity growth reflects the improvement in the quality and quantity of labour, such as human capital, skills, education, health, etc., as well as the use of physical capital, such as machinery, equipment, infrastructure, etc., and the use of new technology, such as innovation, research and development, digitalisation, etc.
According to a report by Statista, the labour productivity growth rate in India was 3.5 percent in fiscal year 2021. This was an increase from the growth rate recorded in fiscal year 2020, which was 2.6 percent. However, this was lower than the growth rate recorded in fiscal year 2019, which was 4.8 percent. The report also stated that India will have to raise its labour productivity growth to 6.3 percent to achieve 8 percent GDP growth while it has to be up by 7.3 percent in order to achieve economic growth of 9 percent.
A growth pattern that will lead to creation of more jobs without compromising labour productivity is one that is based on structural transformation and diversification of the economy. This means shifting workers and resources from low-productivity sectors such as agriculture and informal services to high-productivity sectors such as manufacturing and formal services. This also means expanding the range and quality of goods and services produced and exported by the economy, especially in sectors that have high value addition and competitiveness. This will require enhancing the skills and capabilities of the workforce, improving the business environment and ease of doing business, investing in infrastructure and technology, promoting innovation and entrepreneurship, and fostering regional and global integration.
According to a report by McKinsey Global Institute, India needs to create at least 90 million new nonfarm jobs by 2030 to absorb the new workers who will enter the workforce and those who could move from farm work to more productive nonfarm sectors. The report identified three 'growth boosters' that could spur $2.5 trillion of economic value and 30 percent of nonfarm jobs by 2030. These are:
Frontier opportunities: These are new or emerging sectors that have high potential for growth and productivity, such as digital services, green energy, biopharma, etc.
Globally competitive sectors: These are existing sectors that have proven their competitiveness in global markets, such as IT-BPM, automotive, textiles and apparel, etc.
High-potential sectors: These are existing sectors that have untapped potential for growth and productivity improvement, such as food processing, construction, retail trade, etc.
The report also suggested six areas of targeted reform that could raise productivity and competitiveness across these sectors. These are:
Financial-sector reforms: These include strengthening the banking system, deepening the capital markets, expanding financial inclusion and digital payments, etc.
Labour-market reforms: These include simplifying labour laws and regulations, enhancing labour mobility and flexibility, improving skill development and vocational training, etc.
Infrastructure reforms: These include increasing public and private investment in infrastructure, improving project planning and execution, enhancing infrastructure quality and efficiency, etc.
Trade reforms: These include reducing tariffs and non-tariff barriers, streamlining customs procedures, expanding trade agreements, promoting exports, etc.
Regulatory reforms: These include simplifying business registration and licensing, improving contract enforcement and dispute resolution, enhancing competition policy and consumer protection, etc.
Sector-specific reforms: These include addressing sector-specific challenges and opportunities, such as improving land acquisition and environmental clearance, promoting research and development, encouraging innovation and entrepreneurship, etc.