India's competitiveness

Even South Asian economies like Bhutan ($2,801.3), Sri Lanka ($3,759.2) and Maldives ($8,623.9) perform well above India by this measure of the standard of living. A straightforward question that arises is: What is it that India seems to misconstrue in the economic game that other players seem to get right and succeed in doing?

Spatial differences in the GDP per capita across countries continue to motivate much of the growth theory and development economics even today. However, being a part of an increasingly knowledge-based world economy, India's positioning in the global prosperity scenario must be seen and targetted from the national competitiveness angle.

Competitiveness, in effect, isn't about macroeconomic variables like interest rates, exchange rates, deficits or about cheap abundant labour or even the availability of natural resources or about the state's policies and management practices – although all these are relevant to any economy. Rather, competitiveness can be defined more purposefully as the productivity of a nation's factors of production (labour, land and capital) employed during production processes. In purely economic terms, productivity denotes the value of output per unit of input used.

Talking about productivity in policymaking is no recent phenomenon and, at some point, you are bound to quote Nobel Prize-winning economist Paul Krugman who wrote back in the 1990s that: "productivity isn't everything, but in the long run it is almost everything."

First of all, productivity must not be confused with labour force participation or, for that matter, the output that they produce. A simple example would explain this. Consider a doughnut-making factory having four workers on eight-hour shifts producing 400 doughnuts a day – or 100 per worker or 12.5 per hour. An announcement on hiring four more people to boost productivity would suggest that the new workers will produce more doughnuts per hour than the existing workers.

Remember that productivity is output per hour worked. So, if the new lot of workers were actually slower (producing only 10 doughnuts per hour) than the existing ones, then productivity will, in fact, fall. The four new workers will come up with 320 doughnuts a day and the total output of the eight workers would rise to 720 doughnuts a day. However, the average per worker per hour is just 11.25 doughnuts. The net result is an increase in labour force participation and output – but productivity, in essence, has fallen.

Furthermore, if the company wants to make the same profit as before the new hirings were initiated, it will have to hike the price of the doughnuts it sells. So, it might end up hurting those who buy the doughnuts (because they are the ones paying more for them) and ultimately affect their standard of living as well. A clear implication for the short term, in this case, is that the new workers will have to be trained and skilled, and while they are being trained, their productivity will be lower than the other workers. Thus, for productivity to rise in the medium to long-term, these new workers will have to be skilled better than the current workers by using updated and innovative practices so that the output rises in an even more greater proportion and get adequately reflected in the high and increasing standard of living of all the citizens.

Going back to Krugman's words, productivity then is not everything – the well-being of citizens is; which, interestingly and inherently, is dependent on the productivity levels in the overall economy.

Firms, apart from being productive domestically, have to undergo the sheer pressure and challenge of being innovative and up-to-date in order to attain a global competitive edge as well. This is because international trade and foreign investment have the power to allow companies to specialise in industrial segments that are more productive and become global game-changers. The fact that certain firms in specific industries are able to create and sustain real as well distinct advantages for themselves reflects nothing but the productivity gains that help any economy maintain a higher standard of living for its citizens.

Productivity growth has never really topped the list of issues of policymakers in India, even though productivity growth matters more for emerging market economies than for the advanced world. Trends indicating slow growth in productivity levels across major sectors of our country – and being nowhere close to high-performing economies – do provide strong motivation to rethink our approach since it is sustained productivity growth that can raise living standards over the long-run: If workers produce more per hour, there is more of output and income to share and hence more reasons to celebrate.