India’s Productivity Gap with China Widening Despite Robust GDP Growth, Warns Equirus Securities
India’s labour productivity gap with China has significantly widened by over $30,000 per worker since 2000, according to a recent Equirus Securities report. Despite experiencing substantial GDP growth and a tripling of GDP per worker since 1995, India has struggled to match the productivity transformation that countries such as China, South Korea, and Vietnam have achieved. The report indicates that while India’s productivity growth peaked at 5.3% annually in the 2000s, it declined to 3.4% during the 2010s due to various economic disruptions, including the impact of demonetization, GST implementation, and the pandemic, which led to a sharp contraction in productivity in 2020.
This widening productivity gap presents challenges for the common citizen and the broader market, as stagnant productivity levels can result in lower wage growth, restrained consumption, and potentially diminished economic growth in the long term. The report highlights that despite gains from initiatives like the Production Linked Incentive (PLI) scheme and the ongoing China+1 investment shift, the structural contribution of manufacturing to GDP remains limited. Additionally, barriers such as rigid labour markets and high logistics costs, which are approximately 13-14% of GDP in India compared to 8-9% in China, adversely affect competitiveness and job creation in productive sectors.
Looking ahead, sustaining higher productivity growth will necessitate comprehensive structural reforms beyond mere capital expenditure and incentive structures. Equirus emphasizes that the current government’s focus on capital projects and production incentives is important but insufficient to drive significant change. Addressing transportation costs, reforming land use, and managing commodity price pressures will be vital to enhancing India’s productivity landscape. Given the country’s favourable demographic profile, the integration of capital markets, and increasing foreign investment inflows, there remains a potential for significant growth, but a concerted push towards structural improvements is essential to realize this potential sustainably.
Source: The Hindu
(Expert Note: This report was independently prepared by the Wealthova Economy team.)