Abstract
This article accounts for the structural transformation of the Indian economy over the recent decades. Empirical estimates imply a relatively higher elasticity of substitution in services than in manufacturing, while the growth rates of labour-augmenting productivity in both of these sectors are of similar magnitude, in contrary to what previous growth accounting exercises suggest. Simulation of a multi-sectoral growth model with these estimates succeeds in replicating the trends of sectoral value-added shares as well as the declining labour shares of value added in manufacturing and services sectors during the sample period. The model improves on previous studies in matching the trends of sectoral shares of employment. Thus, the services sector’s flexibility in factor substitution compared to that of manufacturing can explain, at least in part, the rapid growth of services in the recent period.JEL Classification: O11, O41, O53
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