Structural Change and Economic Growth in India: Patterns and Heterogeneity Among the States and Possible Implications for Post-Pandemic Recovery

Abstract

This paper empirically examines the relationship between economic growth and structural change in India over recent decades. It first estimates panel regressions with state-level data, to examine the impact of structural change on growth and vice versa. Bidirectional causality is found, which holds across different specifications and estimation methods: each variable positively impacts the other, in a positive feedback loop. The second part of the analysis relaxes assumptions of constant impacts across states and over time, estimating time-varying auto-regressive models for each state and each pair of variables. The impacts of structural change and growth on each other seem to vary across different states, as well as over time, and are differentially affected by state per capita income levels and national growth rates. Similar variability across states and over time is found in an alternative method: labor productivity decompositions using employment data. Some possible reasons for these differences are discussed. The analysis suggests that national economic policy formulation may benefit from closer consideration of the structural differences across states, and the resulting differences in growth responses. The paper concludes with some possible implications for post-pandemic recovery.