Consequences of Unbalanced Productivity Growth in India: Lessons from the Scandinavian Model

Abstract : Unbalanced productivity growth with one sector lagging behind is seen to spur aggregate inflation in the Scandinavian model of inflation. In other models, unbalanced wage growth embodied in a wage rise shock arising from the home goods sectors is seen to lead to a contraction of the private competitive sector while leading to an expansion of the public sector. Such analyses at a disaggregated level can offer some insights into some puzzling and distressing developments in the Indian economy, namely sluggish growth in manufacturing output and a persisting low level of agricultural productivity. This paper adopts a three-sector model including manufacturing, services and agricultural activity which does give a pointer about addressing the maladies referred to above. Data show that while productivity in services shows a healthy trend, there is a large differential between wages in services and manufacturing. The model gives the result that a hike in service sector wages has a positive effect on manufacturing output, if the propensity to consume out of wage income is higher than from wage income. The surplus in agriculture also increases, consistent with movement of labour into services (not modelled here) and a rise in agricultural productivity.