Total Factor Productivity

Total Factor Productivity

News: 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.

• Productivity levels measure the relationship between total products or output, and inputs or factors of production employed.
• Labour productivity is a measure of total output divided by the units of labour employed in the process of production.
• Total Factor Productivity (TFP) is a measure of total output divided by a weighted average of inputs i.e. labour and capital. Improvements in TFP brings down production costs, raise output levels, and lead to a higher gross domestic product.
• While total productivity measures all-inclusive productivity, TFP is a measure of production efficiency.

India’s performance:
• 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, TFP growth rate is projected to increase to 2%.
•  As per estimates, TFP growth contributed to 30% of India’s GDP growth during 2010-2018. It was largely driven by public administration, quality education and social works.

How can we 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, introduction of efficient technology and processes in domestic companies and reduction in 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. 

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