Doubling India's labour productivity in the next decade: Why and how

Faster growth in labour productivity — output per worker or output per hour worked — is central to India’s development ambition. While productivity growth ultimately depends on workers and businesses, governments also play an important role through their policies and actions.

 

Over the next decade, India needs to impart increased urgency to an internally consistent, mutually reinforcing set of measures that better integrates many existing initiatives. In a well-known quote, the Nobel-prize winning economist Paul Krugman observed, “Productivity isn’t everything, but, in the long run, it’s almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.” Rising labour productivity is the foundation of long-term improvements in real incomes, which are crucial for improving living standards and enhanced personal empowerment. These are the ultimate goals of Viksit Bharat.

 

Internal price structures differ across countries depending on their level of development, so output, income and productivity across countries are best measured using a common set of prices. The most recent update is for 2021. This is the familiar yardstick of purchasing power parity or PPP. The table shows that in 2020, an American worker was nine times more productive than an Indian worker, roughly equal to the gap in real per capita income between the two countries. China succeeded in doubling its real productivity in the decade before 2020. While India’s past productivity performance has been respectable, we can, and must, now raise our ambition.

 

In a speech in July 2017, the late Stanley Fischer, then vice chair of the Board of Governors of the Federal Reserve System (and an inspiration to many generations of policy economists, including ourselves) provided a useful lens through which to understand productivity growth. First, capital investment — physical (such as machinery and transport); and intangible (such as software, design, and business knowledge retrieval systems) — can help to raise output per worker. Second, improved labour quality, achieved through education, vocational training, and experience, enhances workforce capability. Third, systematic innovation (often, though not always, linked to basic research) allows an existing pool of physical and human resources to generate more value. Examples are Henry Ford’s assembly line in 1913, computer-aided design in the 1980s, and artificial intelligence today.

 

India’s agenda for enhancing labour productivity must clearly be different from that of the US. The latter is an advanced country at the technological frontier. India is a fast-growing emerging market with a giant (and still growing) labour force and enormous regional diversity. While India and other emerging markets have their own difficulties, they also possess two important advantages over their advanced country peers in their productivity journey.

 

In emerging markets, there is considerable unsatisfied demand for manufactured goods. As incomes rise, demand for manufactured goods rises. The share of manufacturing in national output, in turn, should rise, increasing economy-wide productivity as workers in the manufacturing sector typically enjoy higher productivity than when employed in agriculture, provided they have the skills to make the transition. This is a formulation that is particularly relevant in a large, relatively closed economy. Our Asian peers (from Japan in the 1970s to China in the 2000s, and Vietnam and Bangladesh today) accelerated this process by exporting manufactures to the global market. India departs from this prototype in two important ways. Our transition out of agriculture (both in output and employment) has been relatively slow, while our export success has been in services, both offshore (body-shopping) and onshore (global capability centres).

 

Second, for countries with the relevant capabilities (and this certainly includes India), technological innovation by the advanced countries provides a pathway to higher labour productivity in both goods and services without the cost of local invention, even if some such innovation (e.g. robotics) is not wholly suited to the relative abundance of labour in our case.

 

While productivity growth ultimately depends on workers and businesses, governments also play an important role through their policies and actions. The country has already taken important steps. National initiatives like the Production-Linked Incentive (PLI) scheme, labour law reforms, Skill India, the National Education Policy 2020, Digital India, and PM Gati Shakti are reshaping India’s workforce and enabling capital formation. Many states are also advancing complementary reforms — in skill development, agro-modernisation, industrial corridors, and services-led urban growth.

 

India can also learn from global experience. East Asia’s industrial ascent highlights the importance of infrastructure and export orientation. Germany demonstrates how support to medium enterprises (the renowned Mittelstand) and vocational training reduce productivity gaps. Nordic countries show how inclusive labour market policies support broad participation in high-productivity sectors. The United States and Japan illustrate how investment in research, innovation ecosystems, and digital technologies — particularly for smaller firms — can generate sustained productivity gains.

 

Emerging technologies, particularly artificial intelligence and generative AI, offer a transformative opportunity. They can automate routine tasks, improve decision-making, and raise efficiency — especially in services. But to harness their full potential, India must invest in digital infrastructure, promote inclusive access, and scale up reskilling, especially for rural and informal workers.

 

NITI Aayog has a central role to play in this effort. By aligning national policy with state-level initiatives, supporting skill development institutions, empowering women and youth, and promoting innovation in aspirational districts, it is helping lay the foundation for long-term productivity growth. Ultimately, India's states — being the real laboratories of reform — must lead the way. Strong coordination between the Centre and states will be essential to achieving inclusive, resilient, and sustained growth on the path to a Viksit Bharat by 2047.

 

Suman Bery is Vice Chairman of NITI Aayog; and Bhaskar Kashyap, a civil servant from the Indian Economic Service, is Additional Private Secretary to the NITI Aayog vice chairman.