Capital Ideas Blog

Smart solutions for India's productivity problem

By Madhur Singh
April 08, 2014

From: Blog


India’s GDP growth slipped to 4% from 9% in just eight fiscal quarters. It has never been more important, as the country’s economy languishes, to improve productivity across the public, private, and social sectors.

A Chicago Booth panel discussion on the topic—organized as part of the celebrations to mark the opening of the University of Chicago Center in Delhi—gave rise to some solutions. 

Steven J. Davis, William H. Abbott Professor of International Business and Economics at Chicago Booth, discussed a field experiment conducted by the University of Stanford and the World Bank on 28 large textile plants near Mumbai. Small improvements in basic management practices made a big difference. By introducing better quality control, inventory management, human resources management, sales management, and so on, the researchers saw dramatic results within a year: defects reduced by 50%, while overall productivity rose by 20%.

These changes seem obvious in the context of more developed economies. Why, then, do poorly managed firms continue to operate as they do, and why do they exist at all? There are several reasons: Firms often don’t have information about global best practices, or do not believe these practices can make a difference; family-owned firms are resistant to outside managers; there are restrictions on competition such as trade barriers or entry barriers for new firms (lack of financing or difficulty in obtaining licenses, for example); and there are barriers to expansion by highly productive firms (due to family size, for example).

Marianne Bertrand, Chris P. Dialynas Distinguished Service Professor of Economics at Chicago Booth has been studying the workings of the Indian Administrative Service (IAS). She said the solution to improving the productivity of Indian bureaucrats lies in introducing accountability and incentives into the system, as well as improving the selection process to ensure that people who are better motivated for public service join the IAS.

Bertrand said no single metric—compensation, selection criteria, internal assessment, and so on—can explain the huge variation in how effective or honest a civil servant is perceived to be. At the same time, she said, the government can improve productivity by simply getting out of sectors where the private sector can deliver more bang for the buck given the right motivation and proper regulation.

Luis Miranda, MBA ’89, senior advisor, Morgan Stanley Infrastructure and chairman of the board of advisors at the Centre for Civil Society, said India's large unorganized sector—where 80% of economic activity takes place—is a big drag on productivity. He cited studies that show that in sectors where the private sector has been allowed to compete with the government—such as education and ports—people and businesses are increasingly choosing the private sector for its efficiency.

Miranda cited the example of OpASHA, a public-private partnership led by UChicago to provide treatment to tuberculosis patients. He said that the program has reduced the cost of treatment to just 6% of what it costs the government, and has improved the success rate to 89% from 32%. And it has achieved all this just by using technology, community volunteers, and conveniently located treatment centers so that people don’t have to miss work to visit the distant government health center.

The key learnings, he said, are that the government must support economic freedom and remove barriers on entrepreneurship and innovation. It must encourage competition. There is evidence, he said, that since FDI was allowed into India in the early 1990s, productivity has shot by 2.5-3 times. And finally, it must put in place an ecosystem that supports scale.

The writing is on the wall. The question is: will India be able to elect a strong government in the national elections in April and May that has the mandate to take these steps?

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