Capital Intensity

Capital Intensity

Context:

Capital intensity in India is on the increase as  the average value of output per unit of net capital stock for the economy as a whole declined from 0.626 in 2011-12 to 0.576 in 2019-20.

Details:

• Capital intensity remained in the narrow range
• There have been significant inter sector differences in the capital intensity
  • Capital intensity has increased for the mining, construction and road transport sector.
  • Capital intensity has declined for professional and other services.
  • Utility services and manufacturing have surprisingly witnessed decline in capital intensity.
  • The household sector (informal), witnessed a rise in the capital intensity, as reflected by a decline in average value of output and value added per unit of net capital stock in 2019-20 compared to 2011-12.

Indicates?

Increase in capital intensity in mining, construction and trade indicate a substitution of capital machinery for labour and an increasing shift to digital payments.

Importance of informal sector–

• In an economy with abundant labour and scarce capital, the informal sector plays an important role as the value of output and value added per unit of capital stock in this sector remains to be usually high.
• Informal household sector is also characterised by having a higher ratio of value added to value of output as the labour (own or hired) is the principal input.
• Increase in the capital intensity in this sector would reduce the future employment opportunities in this sector.

Concept:

Capital intensity is the amount of fixed or real capital present in relation to other factors of production, especially labour. At the level of either a production process or the aggregate economy, it may be estimated by the capital to labour ratio.

The use of tools and machinery makes labour more effective, so rising capital intensity (or “capital deepening”) pushes up the productivity of labour. Capital intensive societies tend to have a higher standard of living over the long run.

However in an economy with abundant labour and scarce capital, raising capital intensity i.e. raising capital to labour ratio have following consequences: 

• Rise in the surplus labour and hence unemployment.
• Rising unemployment leads to the decline in total production as measured by low average value of output per unit of net capital stock, low ratio of value added to value of output.
• Structural unemployment -Structural unemployment occurs because workers lack the requisite job skills or live too far from regions where jobs are available and cannot move closer. Jobs are available, but there is a serious mismatch between what companies need and what workers can offer.