Evaluating the Contribution of Capital Services in Total Production: Evidence Using India KLEMS Data

The importance of capital in raising output or production is widely established. Neoclassical theories emphasized its potential to upturn any nation out of the poverty trap. However, to measure a nation’s growth, capital services, the sum of capital stock and capital composition (indicating the quality of capital) are better measures than capital stock. Therefore, this study uses capital services from the 2021 India KLEMS data to evaluate its contribution to total production in six major sectors, that is, agriculture, hunting, fishing and forestry; construction; mining and quarrying; electricity, gas and water supply; manufacturing; and service sectors, from 1980 to 2019. We employed the growth accounting equation to find a declining contribution of capital services to gross output across most sectors. Similarly, labour’s contribution has declined, while the total factor productivity of some sectors, such as the manufacturing sector, showed continuous improvement during the period. We also used regression analysis to test the robustness of capital services’ contribution to sectoral output growth. Further dividing the sample into pre- and post-financial crises revealed that post-crisis, only the service sector, particularly trade, experienced an increase in capital services’ contribution. To improve the performance of different sectors, the government of India has introduced several initiatives.