India’s investment drive fuels 25-year global productivity surge: McKinsey Global Institute

India’s ‘fast lane’ economy accounted for 11 per cent of global productivity growth recorded in the last 25 years, McKinsey Global Institute (MGI) said in a new report.

Nearly 50 per cent of global productivity growth in the last 25 years came from China (37 per cent) and India (11 per cent) alone, the report ‘Investing in Productivity Growth’ said. As much as 75 per cent of global productivity growth came from all emerging economies combined, the report highlighted.

MGI in the new report explored how productivity in 125 economies has fared over the last 25 years and, in particular, why it has stalled. 

The standout lesson from the research: businesses and policymakers in advanced and emerging economies need to take action to boost the investments that drive productivity.

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India grew its productivity by 5.6 per cent on average annually, only next to China which grew faster. India’s productivity (GDP per worker) went from $6,200 to $21,800 between 1997 and 2022.

As much as 70 per cent of India’s productivity growth is explained by growth in capital per worker. 

“India’s capital stock per worker grew by close to 4x, which is impressive. And yet its level capital stock per worker is still around $38,000, less than half of China’s and less than a third of Central and Eastern Europe, so plenty of margin to keep improving”, the MGI report said. 

Rajat Dhawan, Managing Partner, India, McKinsey & Company, said, “India has done very well across several productivity dimensions, yet there several opportunities to keep improving. India would need to keep up investments to urbanise effectively, build infrastructure, support productivity in services and build higher-value manufacturing.  

For this, the right enablers need to be in place, from institutions that incentivise investment and innovation, to education that allows workers to make the most of those investments.”

Chris Bradley, Senior Partner, McKinsey & Company and Director, McKinsey Global Institute, said, “It can be hard to pick apart what impacts productivity; there are a lot of moving parts. But our research delivers a crystal-clear diagnostic: investment. In most places, increases in capital per worker explains 70 to 80 per cent of overall productivity growth.”

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Sector-specific performance

With high investment across sectors, India did well across most dimensions. It urbanised fast, starting from a low level. With high productivity growth in agriculture (4.2 per cent per annum) it was able to reduce employment in the sector and move people to higher value-added construction and service-sector jobs, increasingly in cities.

But India’s urbanisation rate remains low, so there is a significant margin to keep improving. The share of construction workers went up by 12 percentage points, the share of service-sector workers by 7 percentage points. 

Service-sector productivity growth, often downplayed in development, was very high, at 5.8 per cent per annum, the highest in the world only matched by China.

Manufacturing productivity growth was also high, at 5.7 per cent, in part thanks to the relatively high and increasing complexity of its exports. But manufacturing employment remains somewhat low in India, at 12 per cent of the economy compared to 20 per cent in fast-lane countries such as China, Poland or Vietnam. From 1997 it has only increased by 1 percentage point, so this could be another opportunity, particularly amid global supply chain reconfiguration.

Global productivity growth in the last 25 years has been remarkable, with the median jumping sixfold and more than 1 billion people escaping poverty in China and India alone. 

Yet productivity growth has nearly universally slowed down since about the global financial crisis and some 1.4 billion people in ‘slow lane’ emerging economies have fallen even further behind, the MGI report added.

 Thirty emerging economies, with 3.5 billion people, are in the ‘fast lane’ of improvement; if they were to maintain this pace, they would converge to advanced-economy productivity levels within roughly the next quarter century, it added.