Prasad VSN Tallapragada
Indian Institute of Technology Delhi

Abstract
Allocation of capital, being a finite resource, needs to adopt a well calibrated approach to ensure that the targeted economic priorities are achieved in an optimal manner. Factor shares of income reflect the potential economic priorities more sharply than the overall output and the underlying technical change determines this given the incident elasticity of substitution. Increase in capital’s share of income- with capital augmenting technical change – would increase capital productivity, but would lead to job less growth. Increase in labour’s share – with labour augmenting technical change would lead to increased wages while increasing production costs fettering the competitiveness of the economy. Hence, capital allocation has to be nuanced to support the desired factor’s share in income and the underlying technical change. In the face of technical change that is not conducive for the economic objective sought – such as increasing capital growth or increasing wages- policy changes may have to accompany calibrated capital allocation.    

Keywords: Technical change, Elasticity of Substitution, Factor shares of Income