Factors affecting labour productivity in India

Abstract

India is one of the fastest growing emerging economies, with an average growthrate of 8.8% from 2003-04 to 2007-08. However, this rate has slowed downconsiderably in the last couple of years and is expected to be around 5.4% in2012-13. Many economists believe that the growth in GDP can be kick-startedby improving the supply-side constraints thereby improving the productivity ofthe country. It is also believed that the rigidity in Indian labour laws should beone of the focus areas when addressing these issues. While relaxing the labourlaws might improve the investment environment, there is no conclusive datalinking rigidity/flexibility in labour laws to productivity. This study aims toapproach the equation from the other end and come up with factors that affectproductivity.The study uses previous literature to identify key drivers of productivity andidentifies data points that can be used as an indicator for each factor. Itproceeds to build hypotheses around the effect that each factor should have onproductivity. The study uses cross-state and inter-temporal data from 1997 to2009 to carry out a Principal Component Regression to determine the effect ofeach factor on productivity and test the validity of the hypotheses framed.