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Executive summary

India as a nation has entered a phase of growth which has not been seen in the past.
This all has been due to the tremendous Fiscal and Monetary reforms. Though many
say that this has been due to the political motives but nonetheless has given a huge
boost to the current as well for the future paths of growth. The growth has given a
raise to the system to show the efficiency in the overall setup of the national GDP.
This paper discusses the main factor of the whole growth indicator i.e. GDP; the
PRODUCTIVITY of the nation. Productivity is an important aspect of the
Construction Industry that can be used as an index of efficiency of Production. Since
the area of research is quite vast, I am hereby taking the case of construction industry.
This paper of mine discusses the calculation of the productivity indexes that are being
followed in the construction industry at present and will also take upon some other
calculation methods to measure the productivity of Construction industry and try and
find if how we can implement both aspects of the calculations, i.e. the current one and
one’s that we would take up other than the practiced ones and find out the which
would be a better way also the constraints related to either of them. The study will be
done by using the data collected through data collection from local sources available
on internet. This will be a Down-Top study to understand various formulation
techniques used for finding productivity and will be analysed with respect to some
other industry and compared to find where the productivity study lies in comparison
i.e. Frontier Approach (ignoring the inefficiency factor) or Non-Frontier Approach
(which allows for the inefficiency factor)
1. Introduction

As India enters a phase of huge growth that has been given a push ahead thanks to
huge monetary and fiscal policy changes that have been brought in the recent past,
India as a nation has paved itself a path of growth which has to go long way. And to
sustain the growth that has been brought about we need to build on the overall of
Tangible infrastructure in the country. Currently being the backbone of the Indian
economy contributing to 53% of the total Indian GDP (as on April 2018), and being
the largest employer among the other sectors in India (organised and unorganised); see
fig. 1.
Indian construction industry at present is one of the fastest growing in terms of the
expenditure of govt. entities among the major developing and some developed
countries in Asia. Most of this growth has been observed due to increased flow of
funding into the Infrastructure Development in the nation; See fig 2
FIGURE 1. (sources- Livemint.com)

FIGURE 1. (sources- ihsglobalinsight.com)

1. As has been mentioned and showcased in the given figures above the
construction industry is quite a large factor considered under the GDP and the
growth in this sector has been quite reckoning for this sector. As we go deeper,
we find that the construction sector is divided into 3 segments, namely Large
Projects being handled by the large contractors, medium scale projects
undertaken by both large scale and medium scale contractor & small-scale
contractors or petty contractors. The bifurcation is done on the basis of nos. of
manpower where the small contractors employ less than 200 people, medium
scale 200-500 and the large scale employs more than 500 people. While the
majority of the contractors in the Indian setup are small scale contractors which
constitute to more than 90% of the total (http://www.cidc.in/new/support/vis-
ejournal/Vishwakarma-eJournalJune2007.pdf). The sector of small-scale
construction companies is labor intrinsic, here mechanization has penetrated
less due to low or nil mechanization in that level as a result of smaller value and
scope of work.
2. Literature Review

Components Of Productivity Index.

The construction industry is one of the few industries whose products tend to increase
in value over time, unlike the majority of other industries whose products begin to
depreciate immediately from the time of purchase. The development of individual as
well as total factor of productivity indexes requires correct measurement of output and
input quantities. Ideally, these components are in the form of physical measurable
units. Due to the fact that as the activities and it’s corresponding level in an economy
rises the data in the unit measurable form is quite unavailable, however, many of these
are in the form of it’s quantified unit in terms of the money equivalent.

A. OUTPUT- It’s more easy to make a deduct and derive measures of quantity of
output for Manufacturing industry and the process, as the homogeneity of the
product/output being present there. Let’s just assume that a factory floor is
producing a particular product, the numerical value of the same with respect to
the input can be easily calculated, whereas in construction the number of
building being constructed per unit input is not quantifiable as the parameters
under which the inputs are being used is always different. In terms of
Accountancy we can take the monetary value of all the profit received after
proper addition or deduction of the available inventory of the output can be used
as one of the measures, but in terms of construction, no such inventory is kept,
while the payments are received at the end of the project (or intermittent) there
is no need to adjust the inventory change.
B. labour Input- In construction industry there are three inputs which are
predominantly the major factor; TIME, COST and QUALITY. While labour
productivity is one of the key concepts of Construction management and has a
very direct and close relationship with the other two mentioned factors. While
the labour productivity is dependent upon the factors such as the Risks (the
working environment and height etc), disruption and most often in Indian
perspective change in plans (most often in case of the personal projects) and
Rework. labour productivity is also one of the key indicators of the success of a
construction project; because the constructions works are labour intrinsic sector,
it can always be said that the workforce is the dominant productive factor, due
to the need to concentration of labour for completing a respective.
Calculation of productivity for labour input.
(Total Output) / (Labour +Material +Equipment + Energy + Capital)


(Output) / (Labour + Material + Eqipment)

(Output) / (Labour Cost or Work Hours)

C. MATERIAL INPUT- We classify all the other inputs that have not been put
under the head of the Capital or Labour input. This can easily be computed in
monetary terms as the value of output produced minus the value of the goods
and services purchased.

D. CAPITAL- This is one of the most difficult of the productivity indexes that are
calculated, while the other quantities can be quantifies at a given point of time
and are consumed during the current period of time, the Capital is in a
continuous flow that exceeds beyond the period of the project/construction
phase. The Capital is similar to Labor as both provides us with services, but due
to the fact that mostly price indexes are unavailable for capital, we can’t
calculate the contribution of capital to the production.



One of methodology is Total Facto Productivity-

TFP = net output/ (Hr + Ct)

where TFP is total-factor productivity over period t.

Here the main thing is to be noted here that most of the productivity factors in the
construction industry used are with regards to the Human Recourse noted as Ht and
Capital notes as Ct.

TFP = Vt - materials and services purchased / (Ht + Ct)

Here Vt is the value of the output that’s been produced by a company or the industry.

Total Factor Productivity is denoted by

TPt = total output / total input where TPt is total productivity over period t.

Thus, TPt, = Vt / (Ht +Ct +Mt +Et +Ot)

The Growth Accounting Approach to TFP Measurement.

Growth accounting represents a technique for estimating the contribution of different

factors to economic growth. With the aid of marginal productivity theory, growth
accounting decomposes the growth of output into growth of labour, land, capital,
education, technical knowledge and other miscellaneous sources. In addition, growth
accounting approach to TFP measurement is operationalized by finding the difference
between growth of output and the growth of the weighted sum of all inputs.
The growth accounting approach involves compiling detailed accounts of inputs and
outputs, aggregating them into input and output indexes, using these indexes to
calculate a TFP index. The theory of index numbers is uniquely crucial to the
aggregation of inputs and outputs. The exact relevance of the index numbers theory to
productivity measurement is in the sense of the economic assumptions about the
underlying aggregation functions.
Tornqvist – Theil index
A Törnqvist index is a discrete approximation to a continuous ‘Divisia’ index. A
Divisia index is a theoretical construct, a continuous-time weighted sum of the growth
rates of the various components, where the weights are the component's shares in total
Now for the construction industry the various components that we have taken in to
calculate the Tornqvist Index.

I have used data collected for the construction industry over the time period of 1998 to
2010 for the calculation purposes. The data has been summarised using MS Excel.

GDP From Construction in India decreased to 2378.36 INR Billion in the third quarter
of 2018 from 2491.03 INR Billion in the second quarter of 2018.

Taking the above value for Qt= 2378.36 x 109 INR (source = https://tradingeconomics.com/india/gdp-

For Qt-1= 1064.068 x 109 INR (source = https://tradingeconomics.com/india/gdp-from-construction)

For out put index putting in the formula:-

Rj,t= 7.90% or 0.079

Rj,t-1= 7.74 % or 0.0774

Putting in the formula we get the result as = 0.0272

Xt= 670 x 106 x .3588 x 300 x 365 INR (source = https://www.indexmundi.com/facts/india/labor-force &
https://www.statista.com/statistics/271320/distribution-of-the-workforce-across-economic-sectors-in-india )

For Xt-1= 520 x 106 x .3348 x 300 x 365 INR (source = https://www.indexmundi.com/facts/india/labor-
force & https://www.statista.com/statistics/271320/distribution-of-the-workforce-across-economic-sectors-in-india )

Rj,t= 35.88% or .03588

Rj,t-1= 33.48 % or 0.03348

For input index putting in the formula: -

Putting in the formula we get the result as = 0.048




Qt= .688 x 109 x .9 INR (source = Department of Census and Statistics of Sri Lanka)

For Qt-1= .738 x 109 x .9 INR (source = Department of Census and Statistics of Sri Lanka)

For out put index putting in the formula:-

Rj,t= 2.58 % or 0.0258

Rj,t-1= 3.36 % or 0.036

Putting in the formula we get the result as = 0.555

Xt= 200 x 105 x .1839 x .9 x 300 x 365 INR (source = Department of Census and Statistics of Sri Lanka )

For Xt-1= 225 x 10 x .1915 x .9 x 300 x 365 INR (source = Department of Census and Statistics of
Sri Lanka)

Rj,t= 0.1839

Rj,t-1= 0.1915

For input index putting in the formula:-

Putting in the formula we get the result as = -.1290



A Divisia index can be defined as a theoretical construct to create index number series
for continuous-time data on prices and quantities of goods exchanged. It is designed to
incorporate quantity and price changes over time from subcomponents which are
measured in different units (labour hours and equipment in currency).

A Divisia quantity index has a rate of growth equal to a weighted average of rates of
growth of its component quantities. Similarly, a Divisia price index has a rate of
growth equal to a weighted average of rates of growth of its component prices. The
weights in either case are the relative value shares of each component in total value.
In a single output case, TFP growth (𝑇𝐹�̇ ) is defined as:

𝑇𝐹� = �l −∑ 𝑆𝑗𝑋𝑗̇ ,

where Y is the output, Xj is a vector of inputs (j=1,2, ..., J). S is share of input.

Since most of the data used in Tornqvist index can be used. But the Vector inputs for
both the said examples were difficult to calculate or find, because of unavailability of
stratified data for both the countries which is required to do so.

From the above two methods we can see that for Sri Lankan Building construction
industry context with the Tornqvist index we are getting a higher value which shows
that the productivity in terms of labor productivity is higher, hence the said example
takes into account the efficiency of the whole system and the different Productivity
functions, this can be taken as an example for a Frontier Approach of productivity


The economic concept of production generalizes from a simple, well-defined

engineering relationship to higher levels of aggregation such as farms, plants, firms,
industries, or, for some purposes, whole economies that engage in the process of
transforming labor and capital into gross domestic product by some ill-defined
production process. The production function aspect of this area of study is a well-
documented part of the model. The “function” itself is, as of the time of the
observation, a relationship between inputs and outputs. In a production (or cost)
model, the choice of functional form brings a series of implications with respect to the
shape of the implied isoquants and the values of elasticities of factor demand and
factor substitution. The analysis of economic inefficiency stands at the heart of this
entire exercise. If one takes classical microeconomics at face value, this is a fruitless
exercise, at least regarding “competitive” markets. In the case of a single output, we
can think in terms of total factor productivity, the ratio of actual output to the optimal
value as specified by a “production function.” Two crucial issues, which receive only
occasional mention in, are the functional form of the production function and the
appropriate list of inputs. In both cases, specification errors can bring systematic errors
in the measurement of efficiency. (source-

The Malmquist Index, which can measure productivity, was defined by input and
output distance functions, and thus the resulting index came to be called as the
Malmquist TFP index. Malmquist TFP index is constructed by measuring the radial
distance of the observed output and input vectors in periods t and t+1, relative to a
reference technology. The period t Malmquist productivity index is given by the ratio
of two output distance functions, both using technology at time t as the reference
where the numerator and denominator are the output distance functions for time t+1
and time t respectively based on period t technology. If it is assumed that the state is
technically efficient in both time periods, then the denominator shall be one and hence
Mt would then be equal to D0t (Xt+1, Yt+1).

If the technology exhibits constant returns to scale, then efficiency change and
technical change are the only two sources of productivity change and these are
captured by the Malmquist TFP index. However, under variable returns to scale
technology, the Malmquist TFP index fails to capture productivity change from all
possible sources. First, even if there is no technical change and the state is technically
efficient in both the periods, productivity can still rise by improving the scale of
operations. Second, productivity improvements may also come through the ability of
the state to exploit possible economies of scope that are realized through variations in
the output-mix and the input-mix demonstrates that the latter set of effects are equal to
1 in case of a single-input and a single output and also if the technology exhibits
constant returns to scale.

ECONOMETRIC MODELS (Linear Regression model)

The relationship between dependent and independent variable can be modelled in a

multiple regression analysis using the following equation-

Identification and evaluation of factors affecting labor construction productivity have

become a critical issue facing project managers for a long time in order to increase
productivity in construction. Understanding critical factors affecting productivity of
both positive and negative can be used to prepare a strategy to reduce inefficiencies
and to improve the effectiveness of project performance. Knowledge and
understanding of the various factors affecting construction labor productivity is
needed to determine the focus of the necessary steps in an effort to reduce project cost
overrun and project completion delay, thereby increasing productivity and overall
project performance. Based on the study and survey, although many researchers have
been done and produce the factors that affect productivity, there are still many
productivity problems that remain unknown and need to be further investigated even
in developed countries . In addition, policies for increasing productivity are not
necessarily the same in every country. And the critical factors in developing countries
differ from that in developing countries. (Source- Using Multivariable Linear
Regression Technique for Modeling Productivity Construction in Iraq by Faiq
Mohammed Sarhan Al-Zwainy, Mohammed Hashim Abdul Majeed, Hadi Salih
Mijwel Aljumaily, Open Journal of Civil Engineering, 2013, 3, 127-135)

A major drawback of the deterministic frontier model as specified in is that the entire
deviation of observed output from the maximum output is attributed to inefficiency.
Such a specification does not incorporate random shocks such as structural
adjustments, measurement errors and other conditions that are not under the control of
a producer. Any particular firm faces its own production frontier which should be
randomly placed by a collection of stochastic elements and thus stochastic components
might enter into the model.

Both the efficiency level of each industry and the distribution of efficiency levels
among all sectors in an economy influence mean efficiency of One sector namely
Construction in that economy. Higher efficiency at the industry-level combined with a
higher degree of homogeneity in efficiency among industries yield higher level of
mean efficiency. (Source – comparison of the deterministic and stochastic approaches
for estimating technical efficiency on the example of non-parametric DEA and
parametric SFA methods by Agnieszka Bezat)

Due unavailability of proper secondary data, the required calculation for both the
taken examples i.e. Construction industry of India And Building Construction industry
in Sri-Lanka, the required mathematical operations could only be performed using
Tornqvist index with the given data available. As the Tornqvist index producing a
negative value for the labor productivity factor, the efficiency is certainly not taken
care of in the given industry i.e. the Indian Construction industry, while for the
building construction industry the efficiency is taken into consideration while
productivity is calculated i.e. the Indian construction industry being an example of
following the NON-FRONTIER whereas the Sri-Lankan Building construction
industry is an example of following the FRONTIER approach. The main reason can be
sought that 90% of the contractors in India are Small-Scale where the efficiency
mostly uncalculated for and the basic notation is more the labors more is the
productivity and in most of the works the technological advancement is still lagging
behind, whereas a smaller country like SRI-LANKA has made huge leaps into the
labor productivity by increasing the efficiency by increasing the use of technology,
this can be seen in the result from the calculations.