Many factors hurt labour productivity
Further analysis sheds light on each of the obstacles. Take electricity. On average, businesses faced roughly 27 power cuts per month, with the average duration of each power cut being around two hours. Of course, one can minimise the disruption from power outages by using generators. In fact, 80% of businesses that faced power outages in the previous fiscal year owned generators. Because power created through generators is significantly more costly, however, this clearly affects the bottom line. Lower profits, in turn, could limit their ability to invest in productivity enhancing technologies. While experts often suggest that the government should encourage technology adoption among MSMES, this is impossible to achieve without an input as critical and fundamental as uninterrupted and reliable power.
Figure 2 suggests that there might be some truth to the above hypothesis. For each of the above-mentioned factors, the plot shows the average labour productivity of businesses that reported the factor to be an obstacle versus those that did not (The survey asked respondents to assign a score between 0 and 4 to each factor, with 0 denoting no obstacle and 4 denoting a very severe obstacle. We assigned businesses with a score of 0 to the No obstacle group and the rest to the Obstacle group). Out of the 15 factors, businesses that faced an obstacle for 13 of those factors had lower labour productivity compared to their counterparts that did not face an obstacle. The differences are especially stark for access to finance, labour regulations, tax rates and transport.
Of course, Figure 2 simply displays correlations, and one needs to be careful before drawing causal inferences. For example, businesses that have lower labour productivity could be located in regions that have less reliable power supply. Nevertheless, a clear negative correlation between labour productivity and severity of obstacle for a wide range of factors is indicative of something deeper: it is likely that some, if not all of these obstacles, could be limiting the ability of businesses to hire more productive workers.