Productivity has a big role in India’s $5 in GDP dream

Syllabus subtopic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Prelims and Mains focus: on India’s aim of becoming a $5 trillion economy; TFP and how it impacts the economy

News: The slowdown has revived interest in India’s growth rate as it aspires to become a $5 trillion economy. This would require growing at 8% in real terms, along with a 0.7% rise in total factor productivity (TFP).

What are the factors for economic growth?

• Economic growth is a function of the quantity of inputs such as labour and capital employed for productive purposes, along with factor productivity. It is intuitive that if more people are employed, more goods and services would be produced. Over time, due to a rise in population, labour employed increases and due to accumulation, capital also increases in an economy.

• A rise in productivity enables an economy to grow faster with the same set of labour and capital being employed. It is important to recognize the factors responsible for growth to address the current slowdown.

What is total factor productivity?

• Total factor productivity (TFP) is derived as a ratio of the total production and weighted average of inputs such as labour and capital. The measure gives us the growth in real output, which is in addition to the growth in inputs such as labour or capital employed for productive purposes. So TFP gives us the relationship between the quantity of factors employed and the output in an economy.

• A higher TFP implies higher growth with the same set of labour and capital employed. TFP as a concept was first discussed by Nikolaas Tinbergen (1942) and George Stigler (1947); Robert Solow (1957) developed the framework further.

How has India’s TFP growth evolved over the years?

As per the Total Economy Database (TED), India’s adjusted GDP growth in 2005 was 9%, while TFP growth was 3.5%; in 2006, growth was 9.3% and TFP growth 3.3%; in 2007, the figures were 10.1% and 3.1%, respectively. Evidently, growth came with a substantial improvement in TFP. In 2016 India’s TFP growth was 3.5%, in 2017 it was 1.6% and in 2018 it was 2.4%.

What is the global trend on TFP growth?

Since 2008, TFP growth has been slower for most nations; for China, it has been negative since 2012. TED and Federal Reserve Economic Data on TFP and GDP growth show most economies with 8% or higher growth had TFP growth above 3%. These countries also saw a substantial rise in private capital formation in that period. Recent evidence indicates that TFP might impact GDP growth more than fixed capital. Better TFP does seem to have a positive impact on growth of an economy, whether emerging or developed.

What are the factors affecting TFP?

India can improve its TFP by undertaking bold market and structural reforms that will unshackle its productive capacity, stuck in the primary sector of the economy. Such reforms can cause the reallocation of land and labour from primary to other sectors of the economy, thus enhancing productivity. Investments in physical infrastructure such as highways, dedicated freight corridors, and human capital will also increase TFP.

5% growth cloud over budget

Syllabus subtopic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Prelims and Mains focus: on the recent economic slowdown in the Indian economy and the measures to be taken to overcome it in the upcoming budget

News: India’s economy is expected to grow 5% in the current fiscal, the statistics ministry said on Tuesday, signalling what would be the slowest pace of annual growth since the current 2012-13 data series was introduced.

• Yet, the estimate, which is in line with the central bank’s latest projection made in December, raises hopes that the second half of the fiscal may turn out to be better than the first.

• The economy expanded at 6.8% in FY19. The latest projection indicates that the economy is expected to grow at 5.25% in the second half, after expanding 5% in April-June and 4.5% in July-September, its slowest pace in 25 quarters. Economists said any recovery that this suggests may be weak.

Background

• Asia’s third-largest economy has been witnessing a sharp deceleration in growth, which slid from 8.2% in FY17 to 6.8% in FY19.
• In recent months, the government has taken several steps to try and arrest the slowdown, including a cut in corporate tax rates, while the central bank has offered a monetary stimulus.
• The upcoming Union budget is widely expected to announce more measures to counter the slowdown.

Context: The advance estimate, based on data available so far, comes as the Narendra Modi administration prepares to present the Union budget for FY21 in a matter of weeks. The latest figure may prompt the government to explore more steps to bolster growth.

• Equally, the suggestion that the economic slowdown could be bottoming out will reassure the government that the steps taken so far to boost consumption and private investment are beginning to bear fruit.

• The figures clearly show that government consumption is driving the economy and the private sector contribution to growth is low. To keep the momentum, the government will have to maintain its spending.

What does the data show?

• Official data showed a 2.8% growth in farm output in FY20, nearly the same level seen in the year before, although it is an improvement from the June and September quarters.

• The employment-intensive manufacturing sector will see a paltry 2% expansion in FY20 against a growth of 6.9% in the year before, but here again, the full-year output expansion contrasts sharply with the 1% contraction seen in the September quarter and the negligible 0.6% growth in the June quarter.

• Construction, another employment-intensive sector, too is projected to record a slower growth this fiscal—3.2% against 8.7% a year ago.

Conclusion

• The 5% GDP growth confirms the continuing slowdown in momentum, but what is even more significant in the first advance estimate is the fall in nominal GDP growth to 7.5% in FY20 as compared to the previous peak of 13.8% in FY13, down 6.3 percentage points.

• This fall translates into a fall in tax revenues and an increase in the fiscal deficit, which is both detrimental to growth.

• The fiscal deficit as a share of nominal GDP will look magnified when the denominator shrinks. The budget for FY20 presented in July by finance minister Nirmala Sitharaman had assumed a 12% nominal GDP growth in FY20 from a year ago.

• Economists said various indicators had suggested a modest improvement in economic growth in the second half of the fiscal, and that any reduction in public spending now could pose a risk.

Statistics panel on economic data holds 1st meet

Syllabus subtopic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Prelims and Mains focus: about SCES: mandate and significance; About IIP

News: The newly constituted Standing Committee on Economic Statistics (SCES), chaired by former Chief Statistician of India Pronab Sen, in its first meeting on Tuesday decided to form three sub-groups.

What are the functions of the three sub-groups?

One sub-group will look into the details of the Periodic Labour Force Survey and time use survey; the second group will look into the Index of Industrial Production (IIP) and Annual Survey of Industries (ASI), and the third group will look into details of Annual Survey of unincorporated sector enterprises and services sector data.

Minutes of the 1^st meet

• The committee, in its first meeting, did a stock taking exercise, taking note of the present datasets, one of the members said. Detailed presentations were made on Annual Survey of Industries.
• The three sub-groups will now look into details of two datasets each and make the necessary suggestions. The main committee has decided to hold a meeting on a quarterly basis.

About the SCES

• To review statistics related to economic activity, the Ministry of Statistics and Programme Implementation (MoSPI) had last month constituted a Standing Committee on Economic Statistics chaired by Pronab Sen, in a bid to improve the quality of data amid criticism over the government’s handling of economic data.

• The panel has 27 members in total, including representatives from the United Nations, Reserve Bank of India, Finance Ministry, NITI Aayog, two industry chambers, Tata Trust, and economists and statisticians from several educational institutions.

• The government had also got critics onboard the committee, with three members (now two, after the resignation of Jawaharlal Nehru University professor CP Chandrasekhar) who had, in March last year, signed a joint statement of 108 economists and social scientists that flagged concerns over “political interference” in influencing statistical data in the country.

Mandate of SCES

• The new Standing Committee on Economic Statistics, with 10 non-official members and 15 official members, has been mandated to review the framework for economic indicators pertaining to the industrial sector, the services sector and the labour force statistics.

• It has subsumed four existing committees —

1. Standing Committee on Labour Force Statistics (SCLFS),
2. Standing Committee on Services Sector (SCSS),
3. Standing Committee on Industrial Statistics (SCIS) and
4. Standing Committee on Services Sector and Unincorporated Sector Enterprises (SCSSUSE).

About Index of Industrial Production (IIP)

• Index of Industrial Production (IIP) is an index that shows the performance of different industrial sectors of the Indian economy.
• The IIP is estimated and published on a monthly basis by the Central Statistical Organisation (CSO). As an all India index, it gives general level of industrial activity in the economy.

Importance of IIP

• The IIP is used by public agencies including the Government agencies/ departments including that in the Ministry of Finance, the Reserve Bank of India etc. for policy purposes. The all-India IIP data is used for estimation of Gross Value Added of Manufacturing sector on quarterly basis.
• Similarly, the data is also used extensively by analysts, financial intermediaries and private companies for various purposes.

Index of Industrial Production (IIP) – New series

Any index is to be updated regularly by including new items, updating the base year, changing the methodology in the estimation of index to reflect the changing environment. Here, the CSO brought a new IIP by incorporating certain new elements. This is needed to accommodate the changes happening in the financial sector. Latest changes were made on 12th May 2017.

Modification of the Index of Industrial Production

• The modification made by the CSO is to bring a new base year of 2011-12. Besides the new base year, different sectors have been amended based on National Industrial Classification (NIC), 2008.

• National Industrial Classification (NIC) is an indigenized version of the International Standard Industrial Classification (ISIC) developed by the United Nations Statistics Division (UNSD).

• Significance of the new series is that it uses an improved ISIC version. The NIC 2004 version with the base 2004-05 was based on ISIC version 3.1, whereas the NIC 2008 version adopted in the new series of IIP with base 2011-12 uses the revised ISIC 4 version.

Following are the main changes brought in the new series of IIP:

• Base year has been updated to 2011-12 by upgrading the item basket and weighting structure.
• National Industrial Classification (NIC) 2008 has been adopted in the new series of IIP.
• Items in the item basket are selected at NIC 3-digit level to increase representativeness.
• Number of item groups has increased from 399 to 407out of which 149 are new/ emerging items.
• Electricity generation from renewable energy sources has been included under the ‘Electricity’ sector.
• Weights are rationalised to appropriately to reflect the actual value addition of each sector incorporating effects of subsidies.
• New use-based classification has been adopted with following categorisation: (i) Primary goods, (ii) Capital goods, (iii) Infrastructure/ construction goods, (iv) Intermediate goods, (v) Consumer durables, and (vi) Consumer non-durables.
• A review mechanism has been introduced through a Technical Review Committee.

Data collection for IIP

• The IIP is constructed by the CSO using secondary data. Data is sourced from 14 source agencies in various Ministries/Departments. But the major source of data for IIP is the Department of Industrial Policy and Promotion that supplies data for 322 out of 407 item groups with a weight of 47.54% in overall IIP.
• IIP is released every month in the form of Quick Estimates with a time-lag of 6 weeks as per the norms of IMF.

Components of IIP

• The IIP is basically divided into three sectors though a use-based classification is also provided by the CSO.
• The UNSD recommends inclusion of Mining & Quarrying; Manufacturing; Electricity, Gas steam and Air-conditioning supply; as well as Water supply, Sewerage, Waste management and Remediation activities in IIP. But due to constraints of the data availability on monthly basis, the modified IIP has been limited to Mining, Manufacturing and Electricity sectors only.

Following are the three sectors of the IIP as per the revision based on 2011-12 series.

(i) Mining,

(ii) Manufacturing and

(iii) Electricity as in the old series.

Table: Sectors, number of item groups and weight as per the 2011-12 IIP series

• Number of item groups has been increased from 399 under 2004-05 series to 407 under the 2011-12 series. Each item group may contain several sub-industries.

• In the new base year (i.e. 2011-12), the 407 item groups are divided under three sectors i.e. Mining (1 item group), Manufacturing (405 item groups) and Electricity (1 item) with weights of 14.37%, 77.63% and 7.99% respectively.

Use-based classification of industries under Index of Industrial Production

Besides the main classification of the index into three sectors ie., mining, manufacturing and electricity sectors, the IIP is also prepared based on Use based classification. Here, the industries are divided into six use-based sectors:

• Primary Goods,
• Capital Goods,
• Intermediate Goods,
• Infrastructure/ Construction goods,
• Consumer durables and
• Consumer nondurables.

Table: Weights of the different sectors under the used based classification – 2011-12 series

Core industries in the IIP

• The Eight Core Industries comprise 40.27 % of the weight of items included in the Index of Industrial Production (IIP). These industries are:

Coal, Crude Oil, Natural Gas, Refinery Products, Fertilizers, Steel, Cement and Electricity.

The table here shows the eight core industries and their weights. Refinery products has the largest weights among the core industries.

Syllabus subtopic: Science and Technology- developments and their applications and effects in everyday life Achievements of Indians in science & technology; indigenization of technology and developing new technology.

Prelims and Mains focus: About the genome mapping of Indian Cobra and its relevance for India; Genome sequencing and its significance

News: A consortium of scientists, including some from India, have mapped the genome of the Indian Cobra, among the most poisonous snakes in the country.

Background

• Every year, approximately five million people worldwide are bitten by venomous snakes resulting in about 400,000 amputations and more than 100,000 deaths. Each year, about 46,000 people die and 140,000 people are disabled in India from snakebites by the ‘Big 4’ — the Indian cobra, the common krait, Russell’s viper, and the saw­scaled viper.

Significance of genome sequencing

• Knowing the sequence of genes could aid in understanding the chemical constituents of the venom and contribute to development of new anti-venom therapies, which have remained practically unchanged for over a century.

• High­quality genomes of venomous snakes will enable generation of a comprehensive catalogue of venom­gland­specific toxin genes that can be used for the development of synthetic anti­venom of defined composition.

Why is it important for India?

• Sequencing a genome is an important step to making anti­venom but wouldn’t on its own solve the problem of making and supplying enough of the product to address the huge volume —and variety — of snakebites in India, according to independent scientists.

• India is the snakebite capital of the world. Though bites from 60 of 270 species of Indian snakes are known to kill or maim, anti­venom now available is only effective against the 'Big 4.'

• These 4 species are not found in northeastern India but the region reports a significant number of snake bites. That implies we need new kinds of anti­venom against species here. The krait in Punjab produces a venom chemically different from the krait in South India.

About Genome Sequencing

• Genome sequencing is figuring out the order of DNA nucleotides, or bases, in a genome—the order of As, Cs, Gs, and Ts that make up an organism's DNA. The human genome is made up of over 3 billion of these genetic letters.

• Today, DNA sequencing on a large scale—the scale necessary for ambitious projects such as sequencing an entire genome—is mostly done by high-tech machines. Much as your eye scans a sequence of letters to read a sentence, these machines "read" a sequence of DNA bases.

Why is genome sequencing so important?

Sequencing the genome is an important step towards understanding it.

• At the very least, the genome sequence will represent a valuable shortcut, helping scientists find genes much more easily and quickly. A genome sequence does contain some clues about where genes are, even though scientists are just learning to interpret these clues.

• Scientists also hope that being able to study the entire genome sequence will help them understand how the genome as a whole works—how genes work together to direct the growth, development and maintenance of an entire organism.

• Finally, genes account for less than 25 percent of the DNA in the genome, and so knowing the entire genome sequence will help scientists study the parts of the genome outside the genes. This includes the regulatory regions that control how genes are turned on an off, as well as long stretches of "nonsense" or "junk" DNA—so called because we don't yet know what, if anything, it does.

Govt. may cut spending to curb the deficit

Syllabus subtopic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Prelims and Mains focus: on the govt’s move to cut expenditure and its implications on the economy; on fiscal deficit

News: The government is likely to cut spending for the current fiscal by as much as Rs.2 trillion (Rs. 2 lakh crore) as it faces one of the biggest tax shortfalls in recent years.

Background

Economic growth slowed for six consecutive quarters to 4.5% in July­September, despite a 135­basis­point cut in interest rates by the Reserve Bank of India (RBI) in February 2019.

Likely implications of the move

• Asia’s third­ largest economy, which is growing at its slowest pace in over six years because of a lack of private investment, could be hurt further if the government cuts spending.

• But with a revenue shortfall of about Rs. 2.5 trillion, the government has little choice to keep its deficit within “acceptable limits”.

• The Centre has spent about 65% of the total expenditure target of Rs. 27.86 trillion till November but reduced the pace of spending in October and November, according to government data.

• An Rs. 2 trillion reductions would be about a 7% cut in total spending planned for the year. In October and November, government spending increased by Rs. 1.6 trillion, nearly half the Rs. 3.1 trillion it spent in September. Lack of demand and weak corporate earnings growth in the economy led to lagging tax collections this year. Analysts said growth will be hurt.

• Now, even the RBI seems to have become more worried about inflation rising. It kept its key lending rate on hold on December 5, though it slashed its growth forecast for the current fiscal to 5%, which would be the lowest in a decade. Even a surprise corporate tax rate cut announced by Finance Minister Nirmala Sitharaman earlier this year failed to spur private investment in the economy.

Way ahead

The Centre is likely to keep the fiscal deficit under 3.8% of GDP. It is likely to announce additional borrowing of Rs.300­500 billion for the current year to match the revised fiscal deficit.

About fiscal deficit

• The fiscal deficit is the difference between the government’s total expenditure and its total receipts (excluding borrowing).
• Fiscal deficit in layman’s terms corresponds to the borrowings and liabilities of the government.
• As per the technical definition, Fiscal Deficit = Budgetary Deficit + Borrowings and Other Liabilities of the government.

Note:

1. Deficit differs from debt, which is an accumulation of yearly deficits. The elements of the fiscal deficit are revenue deficit and capital expenditure.
2. A revenue deficit is a difference between the government’s revenue expenditure and total revenue receipts.