Impact of Government Policies on productivity

IMPACT OF GOVERNMENT

POLICIES ON

PRODUCTIVITY

SARABJEET SINGH (16009), BIRPARTAP SINGH (16029), KARAN (16026),

ABHISHEK BANSAL (16034), NISHA (16020)

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Productivity

Productivity gains are vital to the economy because they allow us

to accomplish more with less. Capital and labor are both scarce

resources, so maximizing their impact is always a core concern of

modern business. Productivity enhancements come fromtechnology advances, such as computers and the internet, supply

chain and logistics improvements, and increased skill levels within

the workforce.

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Continue…..

Productivity is measured and tracked by many economists as a

clue for predicting future levels of GDP growth. The productivity

measure commonly reported through the media is based on the

ratio of GDP to total hours worked in the economy during ameasuring period; this productivity measure is produced by the

Bureau of Labor Statistics four times per year.

Total Factor Productivity (TFP) is the portion of output not explainedby the amount of inputs used in production. As such, its level is

determined by how efficiently and intensely the inputs are utilizedin production.

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PRODUCTIVITY IN MANUFACTURING

The studies undertaken by Reddy and Rao (1962), Banerji (1975), Goldar (1986) and Ahluwalia (1985),came up with estimates of TFP growth that indicate that TFP growth in Indian manufacturing in theperiod 1951 to 1979 was slow or negative.

The overall conclusion one may draw from the findings of these studies is that there has been noimprovement in the rate of TFP growth in Indian manufacturing in the post‐reform period compared tothe growth rate achieved in the 1980s. Rather, TFP growth has slowed down. Trivedi et al (2011) forinstance report that the TFP growth rate in manufacturing was 1.88 per cent per annum during 1980 to1991 and 1.05 per cent per annum during 1992 to 2007.

THE JAWAHARLAL NEHRU NATIONAL URBAN RENEWAL MISSION:

The programme was instated to improve the quality of life and infrastructure in the cities and it covered atotal of 63 cities initially, which were later increased to 68. The mission has helped focus attention of policymakers in all three tiers of the government on the challenges facing the cities and towns of India andcreated dynamism in a sector that has long suffered neglect.

THE NATIONAL URBAN HOUSING AND HABITAT POLICY, 2OO7:

This policy aims to bridge the gap between the supply and demand of housing and infrastructure in thecountry.

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PRODUCTIVITY IN AGRICULTURE

Estimates of TFP growth are available for aggregate agriculture, crop sector,livestock sector and even individual crops such as rice, wheat, maize and

sugarcane. Estimates have also been worked out at the state level for majorcrops. Concerns have been expressed on the basis of available evidence thatagricultural growth is becoming unsustainable as a result of resource (soil)degradation.

Mukherjee and Kuroda (2003) report that the growth rates in TFP in Indianagriculture were 1.45 per cent per annum during 1973‐80, 2.33 per cent perannum during 1981‐88 and 1.21 per cent per annum during 1989‐93. Between

1973 and 1993, the average rate of growth in TFP was 2.02 per cent per annum.

Five Indian scientists have been able to demonstrate an increase of whopping40 per cent to 100 per cent in agricultural production using nano-technology -one of the cheapest and abundant minerals available on earth.

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PRODUCTIVITY IN AUTOMOBILES

100% FDI is allowed under the automatic route in the auto sector, subject

to all the applicable regulations and laws.

Manufacturing and imports in this sector are exempt from licensing and

approvals.

The encouragement of R&D by offering rebates on R&D expenditure

4th largest automotive market by volume, by 2015.

4 large auto manufacturing hubs across the country.

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The growth of Indian middle class, with increasing purchasing power,

along with strong macro-economic fundamentals have attracted the

major auto manufacturers to Indian market.

The Department of Heavy Industry, under the Ministry of Heavy Industries

and Public Enterprises, is the main agency in India for promoting the

growth and development of the automotive industry.

The most important being the announcement of the 'Auto Policy' of 2002,which aims to establish a globally competitive automotive industry in India

and double its contribution to the economy by 2010. The policy seeks to

set out the direction of growth for the sector and promote R&D therein so

as to ensure continuous technology upgradation as well as building up of

better designing capacities. It emphasizes on low emission fuel auto

technologies and availability of appropriate auto fuels in order to take

auto manufacturing to a self-sustaining level.

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The objectives of the Auto Policy are

to:-

Exalt the sector as a lever of industrial growth and employment and to achieve a high degree of value addition in the country.

Emerge as a global source for auto components

Establish an international hub for manufacturing small, affordable passenger cars and a key center for manufacturing tractors and two-wheelers in

the world

Ensure a balanced transition to open trade at a minimal risk to the Indian economy and local industry

Conduce incessant modernization of the industry and facilitate indigenous design, research and development

Steer India's software industry into automotive technology

Assist development of vehicles propelled by alternate energy sources

Development of domestic safety and environmental standards at par with international standards

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Another milestone in this field has been the launching of the National

Automotive Testing and R &D Infrastructure Project (NATRIP) which aims to

create core global competencies in automotive sector and facilitate its

integration with the world economy

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PRODUCTIVITY IN SERVICES

Table 2.1: TFP Growth in Services, by Group

(% per annum)

Sub-sector/group

Virmani (2004) Goldar and Mitra (2010)

1965 to 1979 1980 to 1991 1992 to 2003 1960 to 1979 1980 to 2006

Trade, hotels and restaurants -3.0 1.6 3.6 -3.4 2.9

Transport, storage and communication 1.5 2.8 4.9 2.0 3.0

Financing, insurance, real estate and business

services

2.4 4.1 4.7 2.0 3.9

Public administration and other community, social

and personal services.

1.1 3.5

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Indian Railways had introduced the system of Productivity Linked Bonus

(PLB) for its employees in 1979. The index, defined as the ratio of railways

output (measured by the total freight tonne kilometres and a proportion of

passenger kilometres) and input (measured by the total number of non-

gazetted staff), determines the quantum of PLB payable for a year. A PLB

of 78 days for 2010-11 was announced recently.

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Productivity and Efficiency of Banks

Banks form the core of a nation’s financial system, performing the vital function offinancial intermediation through liquidity, maturity and risk transformation. Finance is thelifeline of any commercial activity and banks act as a link between the savers and theborrowers. The productivity and efficiency of banks, thus, critically impacts theproductivity and efficiency of all economic activity and is a matter of concern for policymakers and economy watchers. There are two aspects to banking efficiency which Iwould like to highlight:

(i) Allocational Efficiency: Allocational efficiency focuses on ensuring that the preciousfinancial resources are allotted to the most productive activities as per developmentneeds of society. It seeks to ensure that the broad national priorities are furthered throughthe process of resource allocation and that the interests of the most vulnerable sectionsare protected.

(ii) Operational Efficiency: Operational Efficiency means banks seek to provide financialservices in a safe, secure, speedy and cost effective manner. The goal should be toensure that the transformation function generates least friction in terms of time and costoverlays.

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Improvement in productivity and efficiency, and the resultant decline in cost ofproviding financial services will help in furthering financial inclusion (FI). Moreimportantly, it will help in converting the improved access to financial services intoimproved usage. This improved usage will make the FI activities commercially viableboth for the banks and for the customer and encourage them to scale up their FIinitiatives, thereby helping in quickly bringing the remaining unbanked villages intothe fold of the formal financial system. Hence, banking productivity and efficiencyhas a direct impact on improving financial access and financial usage.

The recent decline in economic growth has presented significant challenges tobanks through rising impairment of assets, pressure on margins and volatility in non-interest income. In this demanding business environment, improved operationalefficiency will help banks in standing up to the challenges and enable them tomaintain their health and profitability. strongly believe that every time the financialsystem has been faced with a crisis, a resolute push towards improved productivityand efficiency has invariably aided it in seeing through the troubled times.

As banks form the core of the country’s financial system, the health and profitabilityof banks will help in ensuring stability and resilience of the entire financial system.Thus, from a systemic stability perspective also, improved productivity and efficiencyof the banking system is a definite positive.

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Government has failed to encourage

private sector in Defence production

India's defence production is almost entirely controlled by state-owned entities.R&D is done by DRDO (Defence Research and Development Organisation),while the manufacturing is done by nine defence PSUs (public sectorundertakings) and the Ordnance Factory Board, which runs 41 ordnancefactories around the country

For a country with such a large defence manufacturing base, India is unique inits dependence on imports. Countries such as UK and France, which employ acomparable number in the defence sector, are large exporters of weapons.India, in stark contrast, is the world's largest importer, sending 70% of its defenceacquisition budget overseas.

India uses about 30% of its defence acquisition budget—Rs 86,740 crore thisfiscal—to import directly, and sends most of the rest to defence PSUs. They, inturn, spend nearly half of that money overseas as well, through an opaqueprocess that sometimes involves a single vendor selected at the executives'discretion. The New Delhi-based think-tank Institute for Defence Studies andAnalyses (IDSA) puts the collective import dependency of defence PSUs at 35-45%.

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PROBLEMS

The political pressure to perpetuate this system is immense. A statist

mindset that glorifies defence PSUs, and the large and unionised

workforce that opposes privatisation, both exert pressure on minister

Antony, who lends a sympathetic ear to such concerns.

The other problem that structurally poses a hurdle to private sector

participation is the office of secretary, defence production. This office,

which reports to the defence secretary, is responsible for defence

production, and the performance of defence PSUs and the Ordnance

Factory Board.

The incentive is to send orders to the companies under this office's watch

and keep the private sector out. Consequently, the order books of

defence PSUs such as Hindustan Aeronautics and Bharat Dynamics are

multiples of their turnover

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Zero defect, Zero effect’ to get boost

The government is planning a major push to ‘zero defect, zero effect’ policyenunciated by the prime minister and has asked various ministries and state-owned companies under them to formulate plans to improve productivity.

National productivity council under the ministry of commerce and industry hasasked the ministries to set up productivity improvement committees to formulateplan of action for 2015.

The ‘zero defect, zero effect’ policy is a part of the overall plan to improve andgrow the manufacturing sector that accounts for just 17 per cent of the grossdomestic product.

The ‘make in India’ campaign, already launched, seeks to facilitate investments inmanufacturing and to push for skill development and building of world-classinfrastructure that supports the sector.

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New foreign trade policy to focus on

services, High-tech exports

The government is running a ‘served from India scheme’ for the services sectorthat allows exporters to import capital goods and consumables duty-free. Theduty concession that they get is up to 10 per cent of the total foreignexchange earned by the exporter in the previous fiscal.

The government may also allow service exporters to use these credits to paypart of service tax liabilities but these incentives will be limited only to Indianfirms.

These incentives will give a leg-up to the sector that has been performing welldespite demand for goods remaining stagnant.

India’s merchandise exports in 2013-14 fell short of the $325 billion target andmanaged to reach $312.35 billion. In 2012-13, exports stood at $300.4 billionand in 2011-12 they were at $307 billion.

Services exports, particularly IT exports, have been showing a double-digitgrowth

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8 Important Policy Measures

Introduced in India

Special attempts will have to be made by the Central and State

Governments to implement the land reforms legislation forcefully so that

the slogan ‘land to the tiller is translated into practice. Unless this is done,

the tiller will have no incentive to invest in land and adopt new agricultural

techniques.

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PRODUCTIVITY

LAND REFORMS

Technological Measures

Institutional Credit

Procurement and Support

Prices

Input Subsidies to Agriculture

Food Security System

Targeted Public

Distribution System (TPDS)

Rural Employment Programmes

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