India trails China in productivity race

New Delhi: India's labour productivity gap with China has widened by more than USD 30,000 per worker since 2000, despite decades of strong economic growth, with the country yet to achieve the industry-led productivity transformation seen in economies such as China, South Korea and Vietnam, according to an Equirus Securities research report.

The report, titled "Labour Productivity in Emerging Economies: Catch-up, Innovation, and now AI", said India's GDP per worker has more than tripled since 1995, but productivity gains have lagged behind some of its Asian peers.

"India's productivity gap with China has widened by over USD 30,000 per worker in absolute terms since 2000, despite decades of strong GDP growth.

India and Bangladesh today sit at near-identical productivity levels," the report said.

The report noted that while emerging market labour productivity has grown steadily over the past three decades, the current phase is marked by sharp divergence across countries.

It identified Vietnam as the standout performer in the post-pandemic period, driven by manufacturing-led foreign investment, while India continues to face structural constraints.

According to Equirus, India has "not yet executed the industry-led productivity leap that China, Korea, and Vietnam delivered in their high-growth phases." The report said India's labour productivity growth accelerated to 5.3 per cent annually in the 2000s on the back of the IT and services boom, but slowed to 3.4 per cent in the 2010s due to a series of economic disruptions.

It pointed out that India's productivity performance suffered from "the demonetisation shock (2016), GST implementation disruption (2017), and NBFC liquidity crises" that weighed on the informal economy.

The report also highlighted the severe impact of the pandemic on India's productivity.

"India's COVID shock (-12.3% in 2020) was the sharpest in this dataset - a direct consequence of informal sector dependence, migrant labour exposure, and strict lockdowns," it said.

While productivity growth has recovered in recent years, Equirus said the rebound remains uneven because India's most productive sectors account for a relatively small share of employment.

"The services-manufacturing divide means India's headline productivity is highly uneven.

If services are stripped out, productivity growth in goods-producing sectors has been far more modest," the report noted.

It said schemes such as the Production Linked Incentive (PLI) programme and the China+1 investment shift are supporting growth in sectors including electronics, pharmaceuticals and auto components.

However, these gains have not yet translated into a structural increase in manufacturing's contribution to the economy.

"The PLI scheme and China+1 FDI thesis are real tailwinds - electronics, pharma, and auto components are showing genuine output gains.

But manufacturing's share of GDP has not structurally risen," the report said.

Equirus identified labour market rigidities and high logistics costs as key barriers to stronger productivity growth, noting that logistics costs remain around 13-14 per cent of GDP compared with 8-9 per cent in China.

The report concluded that India's long-term fundamentals remain favourable due to its demographic profile, capital markets, foreign investment inflows and digital infrastructure.

However, it cautioned that sustaining higher productivity growth would require deeper structural reforms beyond capital expenditure and incentive schemes.

"The current administration's focus on capital expenditure and PLI is necessary but not sufficient - transportation costs, commodity pressures, land reforms; would be crucial to push the needle towards a high-productivity story akin to China," it said. ...