High Productivity Needs Fresh Mindset
For a nation blessed with land, nature in abundance with its sunshine, rivers, wind, and natural resources, and the societal need to grow economically, India has poor labour productivity. Yet we are not lazy people, are we?
There is something that has worked for other nations whose productivity norms overshadow our attempts. Indian productivity levels over the past decade have been a topic of concern, with data and statistics highlighting the relatively lower productivity compared to other manufacturing economies. Yet this is a sensitive topic - both politically and policy-wise. While newer policy initiatives have been launched, some with success, is there an Indian mindset trouble about productivity?
Productivity refers to how efficiently resources are used. Labour productivity is calculated by dividing the output by the amount of labour used to generate that output. The decades-long inefficiencies of India’s infrastructure, logistics and supply-chains, and corrupt practices, put a considerable burden on achieving cost efficiencies for businesses operating in India, leading to low productivity and increased cost of production. There has been policy push with political tenacity to make India as a global manufacturing hub. There are initial success sectors like electronics where it is seeing good traction. But that’s only a portion of the larger potential we need to build. Introspecting on this theme is not a negative attitude, but rather starts from positive intent to discuss how to develop India as a global hub of productivity.
Despite the construction of newer infrastructure, we cannot solve for the existing gap overnight. In addition, the durability and quality of these newer infra have to be tested for next few years for their consistency of endurance. We are now building fantastic highways, ports and airports, amongst many other projects. But the old mindset of queues and the policy-paranoia of controlling citizens continues. For example, look at the needlessly long queues at the toll plazas (right from over-staffing there, to fast-tag scanning machines being slow or not even working), to even terrible long queues at the our airports. We need to stop trolling about how we are better than even developed nations. Let those old processes of outdated economies not be our benchmark. We need to get out of that mindset to ensure that despite our population, we can have lesser queues for everything - that needs a genuine service-orientation mindset. What will it take ?
For all the technology innovation that we have about newer robust roads that we build on our highways, we are challenged to have even the basic quality roads in most of our metros that can last one monsoon without breaking up into potholes. It shows us poorly in our ability towards town planning as well as low respect for quality of living. If we want to overtake the productivity of other nations ahead of us, it’s simple logic that we need to do more. Do it smartly. Do it efficiently. Do it quickly. Do it inclusively end-to-end. Have an integrated infrastructure development across the value chain, and not just in pockets.
Learnings from neighbours
India's industrial productivity has long been a subject of debate, both politically and in policy circles. Despite being one of the world's largest economies now, and being the fastest growing global economy, India struggles to match the productivity levels of its peers such as China, Vietnam, and Bangladesh. Addressing this issue is crucial for India's sustainable economic growth, additional job creation, and global competitiveness - all of which are essential to keep its younger demographics economically engaged and socially active, while having the macro comfort of being able to take care of the ageing and disadvantaged.
While India could play well the role of global information technology outsourcing hub, it has not met similar success for its manufacturing sector. Enough has been spoken about the labour cost arbitrage that India offers. The discussions will pause, when such an advantage is discounted for actual productivity aspects.
Traditionally India has been a large domestic market, with lower purchase capability as well as with the trade barriers that made us accept poor or lower quality and longer lead times. Hence we have seen much of our generations willingly accept low quality products with the thinking that cost was a primary factor. In addition, the low labour costs and high interest rates ensured that the math to invest in automation didn’t work out for the manufacturing sector promoters. It further precipitated our inherent willingness that labour standards and productivity was at acceptable level. But then scale and quality become the base for ensuring growth with global markets, and this needs automation. A catch-22 ?
The social cost of what to do with the displaced workforce, and the heavy hand of the labour laws remain the larger politically sensitive dilemma, that has terrible optics for a corporate. But then scaling their business profitably is their purpose of existence, which drives them to markets that allow them to scale with automation. To help the automation-impacted workforce, the solution is to move the sector up the value chain, which expects an educated and skilled workforce. This is the cycle we are stuck in.
There are several factors contributing to the relatively low productivity levels in India compared to other manufacturing powerhouses like China, Taiwan, Vietnam, and Bangladesh. Labour productivity is a crucial measure of economic performance and efficiency. According to the World Bank's data on GDP per hour worked, India lags behind several manufacturing economies. In 2019, India's labour productivity stood at approximately $9.8 per hour, significantly lower than China ($19.6 per hour), Taiwan ($33.4 per hour), and Vietnam ($14.5 per hour). Total Factor Productivity measures the efficiency with which inputs (such as labour and capital) are utilised to produce output. TFP growth reflects improvements in technology, innovation, and overall productivity. The Conference Board's Total Economy Database reveals that India's TFP growth has been relatively low compared to other economies. From 2010 to 2020, India's TFP growth averaged around 1.1% annually, whereas China, Taiwan, and Vietnam recorded higher TFP growth rates during the same period. In the global market, comparisons about productivity, cost efficiency, scale, quality are a given. While we celebrate any global ranking improvement, we just can’t rubbish them if we lose few points. The intellectual force used to rubbish any report that shows any decline in our progress could rather be spent in ensuring better processes and outcomes to be steered for our productivity improvement.
Ask most businessmen in private about corruption or delays around businesses, they would say it exists. The ground level corruption to get projects off the ground does seem to continue. It is not fear of retribution that stops people from complaining, it is the slowness of such a process and vindictive systemic fallout that could hurt not only the complainant, but the locality or sector as a whole. No wonder that these won’t be solved with surveys where everyone answers what is expected of them.
Is this why most of large Indian manufacturing entities have diversified their business interests globally, as a derisking strategy to avoid manufacturing concentration ? Policy makers and political leaders need to understand global comparisons of what has worked, and what they can do to enable growth. That path also needs introspection to ask and be ready for awkward answers about speed of decisioning, local level corruption, interference etc. We have to truly introspect if the old rent-seeking leeches have taken newer avatars. We also need better centre-state cooperation and even state-to-state collaboration. Once a global investor is invited into the country, those investors have to also deal with state-level and local civic-level bureaucracy and politics. This is where we need cohesion in understanding what each state can offer, and not just compete with each other state. Of course, the starting of decriminalising of various non-compliances is a good beginning. But it needs faster work, to avoid local level corruption and harassment.
In addition, we need to make competitively available utility tariffs, and to reduce turnaround times. For example, India has higher power tariffs compared to Vietnam. The Indian ports have slower turnaround time and efficiency of labour availability and their productivity is lower too. The difference between Vietnam and China and India is the regulatory ease and consistency of regulations, and their ease of doing business. Does the Indian regulatory mindset seem focussed in assuming that every business is corrupt and set to game the system ?
Any infrastructure, that does not include fully integrated multi-nodal transportation networks, power supply, and logistics, will pose significant challenges for Indian industries in their efforts to expand. Insufficient connectivity and unreliable infrastructure increase production costs, hamper supply chains, and limit the scale of operations. In addition, we need to scale up development of skilled workforce, crucial for boosting productivity. India's education system needs to fast track its efforts in vocational training and practical skill development to bridge the existing gap between industry requirements and workforce capabilities. While there have been efforts such as NSDC, probably more local participation and cluster-based approach to industrial training is needed. Additionally, initiatives must be taken to align education with emerging technologies to meet the demands of the digital age. Skills and education play a critical role in enhancing productivity. The Annual Status of Education Report (ASER) by Pratham Education Foundation highlights gaps in learning outcomes among Indian students. The 2020 report indicated that a significant percentage of Indian children lacked foundational skills in reading and mathematics, indicating a need for improvement in the education system to develop a skilled workforce. Hopefully the NEP implementation could solve for many of the existing gaps.
Cumbersome bureaucratic procedures, complex regulations, and compliance burdens hamper productivity and discourage entrepreneurship. Streamlining regulatory frameworks, simplifying licensing processes, and fostering a business-friendly environment will encourage industrial growth and productivity. This has to start with trust between the industry and bureaucracy. Limited access to finance, especially for small and medium-sized enterprises (SMEs), hinders their ability to invest in modern technology, expand operations, and enhance productivity. Initiatives like improving ease of doing business, expanding credit availability, and promoting innovative financing mechanisms can alleviate this challenge. Current schemes have made some progress, but lot more needs to be done. Surveys in understanding practical issues due to which some of these schemes still not reaching the intended sectors might throw light. Micro, Small, and Medium Enterprises (MSMEs) form the backbone of India's manufacturing sector. However, many MSMEs struggle with low productivity due to limited access to capital, technology, and skilled labor. Supporting MSMEs through targeted policies, easy access to credit, technology upgradation schemes, and capacity-building initiatives can unleash their potential and contribute significantly to overall manufacturing productivity. We need to examine the possibilities of setting up multiple SROs across various sectoral focus to help SMEs and MSMEs come to global standards.
Embracing advanced technologies, such as automation, artificial intelligence, and digitisation, can revolutionise Indian industries and drive productivity gains. Encouraging innovation through research and development (R&D) investments, collaboration between industry and academia, and promoting technology transfer can unlock significant growth potential. While it has been debated before, the Indian manufacturing sector actually spends very little in R&D. It is urgent need to introduce taxation benefits that can get manufacturing sector work with academia and set up research capabilities. Unless India can have resourceful research centres, we will continue to lag. Jugaad can only get us so much, we need innovation capabilities built in.
China & Vietnam
Countries like China and Vietnam have benefited from economies of scale and the concentration of industries in specific geographic areas. These cluster effects help reduce costs, encourage innovation, and foster knowledge-sharing. In India, industries are dispersed across the country, making it difficult to achieve similar scale and cluster benefits. These data points underline the challenges India faces in terms of productivity growth compared to other key manufacturing economies. The positive aspect of this is that the government has recognised these many of these gaps and has been implementing various initiatives, including skill development programs, infrastructure investments, regulatory reforms, and the Make in India policy, to address the productivity gap and attract foreign manufacturers.
China's rapid industrialisation was driven by robust investments in infrastructure, focused skill development initiatives, and strong government support. China implemented a series of industrial policies aimed at promoting targeted sectors and encouraging technological advancements. Initiatives such as "Made in China 2025" and "Innovation-Driven Development" focused on upgrading industries, fostering innovation, and enhancing productivity through the adoption of advanced technologies. It helped industries improve their pricing capabilities, as well as product-positioning. China invested heavily in infrastructure development, including transportation networks, ports, and power supply. The development of efficient logistics systems and modern infrastructure played a significant role in facilitating the movement of goods, reducing costs, and enhancing productivity. China attracted substantial foreign investment, particularly from multinational corporations, by offering incentives, establishing special economic zones, and providing a favourable business environment. This influx of FDI facilitated technology transfer, knowledge sharing, and the adoption of advanced manufacturing practices, contributing to increased productivity. China’s labour-intensive manufacturing production (of textiles, apparel, footwear etc.) has been concentrated in firms employing 1,000 or more workers. In comparison, Indian manufacturing is concentrated in firms with under 20 workers. India’s labour regulations are rigid, with multiple laws at the national level and in various states. Existing labour laws encourage a low scale of manufacturing, as many laws apply only when businesses have a certain number of workers, and consequently has lower-than-potential productivity.
Vietnam implemented economic reforms, known as Đổi Mới, in the late 1980s to transition from a centrally planned to a market-oriented economy. These reforms led to the liberalization of trade, foreign investment, and business regulations, creating a favorable environment for the manufacturing sector to thrive. Vietnam adopted an export-oriented approach, focusing on manufacturing and attracting foreign investment in export-oriented industries such as textiles, electronics, and automobiles. This strategy helped drive industrial growth, increase production capacities, and boost productivity. Vietnam actively pursued regional and international trade agreements, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU-Vietnam Free Trade Agreement (EVFTA). These agreements opened up access to larger markets, facilitated technology transfer, and stimulated investment in the manufacturing sector.
Complex challenges
However, it is worth noting that productivity is a complex and multifaceted issue influenced by various factors. While India may face challenges in productivity, it also possesses unique strengths, such as its large domestic market and a growing middle class, which can serve as potential drivers for future productivity improvements.
Shifting Geopolitical strategies of global manufacturers rapidly accelerated during covid. It also factored in the rising wages in China, and Chinese interests in moving away from low-cost and cost-arbitrage manufacturing to high tech manufacturing with higher margins. But critically what can India offer in this aspect to global manufacturers ? None of India’s 250 SEZs, with average size of 0.25 Sqkms, can match a Shenzhen in China. It has an area of 1,950 sqkm. China has many such industrial belts / SEZs. Laws and regulations have to accommodate for the flexibility needed in labour decisions. With multiplicity and at times, duplicity of labour and manufacturing laws, rules and regulations, it is an urgent mindset change needed across centre & state politics and polity. Unless they are in alignment, the manufacturing sector will become the ball that would be tossed in between.
In the short term, it might be a good idea for the government to use its capex expenditure to crowd private investments into manufacturing. But equally important would be to get private investors with patient capital to invest into consumer needs production. Data on the supply side economics has not been encouraging in this aspect. We also have to be pragmatic that manufacturing would not be able to generate jobs at scale across India the same way it did in other Asian economies like Japan, South Korea and China, given increasingly high levels of automation.
Global companies seek efficient and productive manufacturing environments, and low productivity levels can deter investment. To attract foreign manufacturers, India needs to address the aforementioned challenges by focusing on infrastructure development, skill enhancement programs, regulatory reforms, technology adoption, and the creation of industry clusters. Just as we see in getting more global mobile and other electronics manufacturers interested to manufacture from India, we need to improve our productivity to make use of these opportunities. Also in the era of IoT, and emerging technologies, there is bound to be much scope for manufacturing.
However even if we look at few societal behavioural nuances, we can learn where our efficiency corrections could happen. Be it white collared or blue collared, we take too many breaks during work - be it for chai or ciggies or conversations. This is something not observed in markets with higher productivity. Our Jugaad mindset allows us to assume that lack of excellence can be sorted-out later. We need to move from jugaad to focussed innovation. Interestingly our work productivity mindset is not just poor at the economy level. Even our democratic institutions like the legislatures fare low on this count. Both houses of Parliament were adjourned sine die last month, bringing an end to the Budget Session that registered very low productivity of 33 per cent in the Lower House and 24 per cent in the Upper House.
Only the concept of 3-I : innovation, improvements and intent - to be a global manufacturing hub can propel us ahead, and quicker. We need to think how the lowest manufacturing process in any of our MSME can match or deliver the output that a global client is seeking. We have to learn from our own digital public infrastructure experience. We have built the global-first, and global-best. Digital and data can disintermediate much of the value chain that slows down our productivity.
Looking at countries like China, Japan and Korea who fought the national-tag-bias to move from being seen as cheap-product-manufacturer to high-quality-global-product provider, India has to decide - will the “Made in India” products get purchase premium ? How much of technology in manufacturing will be sufficient enough to deliver world-class products at class at competitive prices? With the speed of changes that emerging technologies are bringing in, how do we balance human need versus technology ? With AI shaping many sectors, including manufacturing and services, it will impact human productivity. How do we deal with it ? Can our manufacturers use exports as a way to improve their ability to scale and profit ? There are no right answers, but it would need introspection and efforts across multiple ideas, in what strengths should we play with. Critically can the outcomes deliver inclusive growth for the country, and not just make few privileged wealthier?
