F
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3 October 2017
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GVA and employment share inverse correlation in Indian economy
Analyzing GVA growth via labor market
During the first decade of the 21 century, as much as 85% of GVA growth can be attributed to productivity gains
rather than labor employment. Not surprisingly then, employment elasticity with respect to GDP growth is very low in
the Indian economy.
Nevertheless, most of these conclusions change quickly if we exclude the agricultural sector. The contribution of
st
productivity gains to non-farm
real
GVA growth was ~55% in the first decade of the 21 century, as against ~46% three
decades ago. Further, employment elasticity in the non-agricultural sector is much higher than that in the total
economy.
There is, however, one uniform conclusion with or without the farm sector – an inverse relationship between real
GVA and employment growth in the Indian economy, challenging the established economic literature. If not higher
GDP growth, then what can push job creation in India?
st
This product of ours was named ‘Fuel or Engines’ to represent the consumption
versus investment theme, which we have been discussing for 18+ months now. Our
detailed report released in June 2016 concluded very clearly that with lackluster
investments, consumption is unlikely to bear the entire burden of GDP growth for
long. As and when consumption slows, we argued that real GDP growth will slow
down inevitably because even higher investments will not be able to offset the
impact of slower consumption. With the focus shifting on employment, we plan to
devote the next few versions of this product to the labor market situation in the
Indian economy.
In our view, an alternative way to analyze GDP/GVA* growth is to look at the labor
market. There are only two ways in which GDP can grow – either by increasing labor
employment or raising productivity (or a combination of both). GDP growth in an
economy is equivalent to the summation of growth in labor employment and its
productivity. Thus, for any given level of GDP growth, the higher the productivity
growth, the lower the employment growth required.
Productivity accounted for as much as ~85% of real GDP growth…:
While
Productivity gains
accounted for ~85% of real
GVA growth during the
recent decade
employment accounted for about two thirds of real GVA growth in 1970s, its
contribution fell to as low as 15% during the most recent decade for which data are
available
(Exhibit 1-2).
It implies that productivity gains accounted for ~85% of real
GVA growth during the recent decade. Thus, while employment has grown by only
1.2% per annum during the recent decade (FY04-13, when real GVA growth
averaged 7.6%), productivity growth averaged 6.4% per annum.
* We have used GVA and GDP synonymously in this note because the large difference between GVA and GDP is a recent phenomenon,
which is not covered in this study
Nikhil Gupta – Research analyst
(Nikhil.Gupta@MotilalOswal.com); +91 22 3982 5405
Rahul Agrawal – Research analyst
(Rahul.Agrawal@motilaloswal.com); +91 22 3982 5445
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.