Reserve Bank of India (RBI) governor Raghuram Rajan ’s recent speech touching upon the “Make in India" campaign has drawn a lot of attention and some have interpreted it as veiled criticism of the programme.

He said that talk of India adopting the East Asian model is too facile and ignores the reality of constricted export markets, with growth in the global economy hard to come by. He has suggested that a more appropriate slogan could be “Make for India". Catchphrases aside, Rajan made the point that what is important for rapid growth and, indeed, for making in India, is efficiency in producing goods and services.

But how efficient is Indian production? The chart shows the value added per hour worked, a measure of labour productivity, in manufacturing and services among several emerging markets.

The data are from the Organisation for Economic Co-operation and Development’s (OECD) recent India survey. The numbers are in dollars at purchasing power parity. The data show India’s labour productivity is far below other emerging markets in manufacturing, although it does manage to be better than China in services. But what the chart shows is that, at the moment, Make in India is often “Make Inefficiently in India". For that to change, productivity must increase.

One reason for India’s low productivity in manufacturing is the preponderance of small firms. The OECD report points out that employment in manufacturing firms with less than 10 employees accounts for 65% of all employment in manufacturing, compared with 14% on average in the OECD countries and 9% in Brazil. The OECD says productivity gains have been negative in sectors such as construction, mining, wood and wood products, rubber and plastic products, textiles and leather products, basic metals and fabricated metal products between 1980-81 and 2011-12. Growth of value addition in the manufacturing sector has been largely the result of increased capital, rather than of total factor productivity.

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