Structural change and economic growth in India

Abstract

Using detailed sectoral data from India KLEMS, we analyze the role of structural change in determining India's aggregate productivity growth during 1980–2011. In general, the impact of static structural change on aggregate labor productivity growth has been positive, as workers moved to sectors of a relatively higher labor productivity level. However, dynamic reallocation effects—worker movement to fast-growing industries—have not been observed. The pro-market reforms in the 1990s did help a TFP growth-enhancing allocation of capital across sectors. The relative importance of the manufacturing sector for aggregate TFP growth has increased in recent years. Yet, India's structural transformation features the absorption of workers in the construction sector and slow and stagnant job creation respectively in services and manufacturing sectors. This poses a challenge, as the potential for productivity growth in construction and services are limited, and the changing nature of manufacturing production provides less room for absorbing less-skilled workers.