The Hindu Business Line : Power of productivity

THAT the Budget 2004, crafted by a dream team of a government wearing pro-poor symbols on their sleeves, should be the causus belli for the Left Parties, to clamour against privatisation per se and hike in FDI is only mildly surprising.

Even as the government is trying to sustain the path of high growth achieved last year it is disappointing that the economic pundits fail to recognise the power of productivity. For instance, the cost of modernisation of the armed forces involving a whopping increase of 18 per cent could have been offset by a mere 4 per cent reduction in personnel both combatants and civilians increasing the efficiency of static establishments. Economic development is a slow process.

Even if our country grows at the rate of 7 per cent a year, as it is projected, nudged by good monsoon rains year after year, it would take us 50 years to catch up with the US. India's failure to raise up to the challenge of China in becoming the global destination of world-class low cost manufacturing shows that the private enterprises are also tardy in learning to cope with competition. Nor has the government been helpful in dismantling rapidly market-distorting policies.

A recent study by McKinsey's Global Institute reveals great insight as to how the income level of a country is determined, above all, by the productivity of its largest industries. The study observed that the rapid growth of productivity in the US in the 1990s did not come from the new fangled dotcoms and hedge fund companies but by just six industries; construction, manufacturing, retailing and wholesaling being chief among them.

So far in India, the fast-growing IT industry is yet to raise the living standards of more than a minuscule part of the population. The McKinsey study also says that small and medium companies in India on an average have a labour productivity of only 15 per cent of what their US counterparts achieve. The study also calculated that these companies could increase their productivity to about 40 per cent of the US average without any additional capital investment, just by reorganising the way they conduct work.

R. Sundaram