Technological progress and sectoral shares in GDP: An analysis with reference to the Indian economy

Abstract

•Distribution of much of the benefits from productivity gains across sectors through adjustment of relative prices causes value added per unit of output to fall in the progressive and rise in the relatively stagnant sectors. Under such circumstances, if total factor productivity is sought to be measured by taking value added as a proxy for output the result will inevitably be underestimate for the progressive and an overestimate for the relatively stagnant sectors.•Transformation of a low-growth inward looking economy into a substantially liberalized, globalized, high-growth economy had implications for the technical (intermediate input) structure of production as well as adjustment (erosion and buildup) of value added across sectors through changes in relative prices. The study observes that the relative price for the manufacturing sector (vis-a-vis the GDP deflator) declined steadily while that for the service subsector EHPAD (education, health, public administration and defence) increased fast, causing significant adjustment of sectoral value added.•The most interesting finding is the drag on the share of the manufacturing sector caused by adjustment of relative prices; this paring of sectoral share is an important explanation for the stagnation of relative share of manufacturing in GDP of India.•Admitting that the precise measures of sectoral gains or losses are inevitably subject to limitations of quality of data, the very consistent behaviour of the manufacturing and the EHPAD sectors over all the phases of our study lends strong support to the basic hypothesis of Baumol’s disease for the Indian economy and throws light on the apparent stagnation of manufacturing’s GVA share.