Total Factor Productivity (TFP) – Recent trends in TFP of India and the world
Context: 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 does TFP measure?
Productivity:
- Productivity levels measure the relationship between total products or output, and inputs or factors of production employed.
Labour Productivity VS Total Factor Productivity (TFP):
- Labour productivity is a measure of total output divided by the units of labour employed in the process of production, while total factor productivity is a measure of total output divided by a weighted average of inputs; i.e., labour and capital.
Total Factor Productivity VS Total Productivity:
- While total productivity measures all-inclusive productivity, TFP is a measure of production efficiency.
What does improvement in TFP mean?
- Improvements in TFP bring down production costs, raise output levels, and lead to a higher gross domestic product.
How has India fared thus far in TFP growth?
- 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, the TFP growth rate is projected to increase to 2%.
- As per estimates, TFP growth contributed to 30% of India’s GDP growth from 2010 to 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, the introduction of efficient technology and processes in domestic companies and reduction in the 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.
What does improved productivity mean for the industry?
- 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.
Practice Question for Mains
- Considering the moderate decline of India’s TFP compared to the global experience, Discuss the need for an improved TFP in the case of India (250 Words, 15 Marks).
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