India's labor productivity problem

India's share of population employed in agriculture has fallen sharply from 60% in 2000 to 51% in 2010 and the pace of decline is set to quicken in the coming years. In addition to transitioning those leaving agriculture, there is the need to accommodate the nearly 12 million people who are expected to join the workforce each year. In most historical examples of such growth transitions in developing countries, industries sector has provided the major share of new employment opportunities.

However, as the Economic Survey 2012-13 highlights, recent trends in industrial employment creation in India has been cause of concern. Even if industry's share of total employment has been comparable to other large Asian countries at similar stage of their growth, its share of gross value added has remained more or less stagnant over the last decade and is far less than that in other countries.

The main reason for this near stagnant share of industrial sector value addition is the low productivity in the sector. This becomes especially pronounced since construction, where most employment is in the informal sector and involves mostly unskilled and semi-skilled workers, has been the fastest growing segment within industry.

In fact, this low productivity trap extends to informal sector economic activity in general. The value addition by a worker in the informal sector is only a small proportion of that in the formal sector for workers in similarly sized firms.