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The Stylised Pattern of Structural Change and Economic Development In India – 1950-2020

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By Prof Balwant Singh Mehta and Dr Arjun Kumar

Process of Structural Change

The process of economic development has been historically linked with the general pattern of structural changes in the national economies of the globalised world. It occurs with changes in structures of broad economic sectors (agriculture, manufacturing and services) in terms of share of output and employment.

The sequence of structural change is associated with a falling share of agriculture, which was, at first, offset by a rising industrial sector in the early stages of development. Thereafter, services took over the lead role, only after a fairly high level of development had been achieved from manufacturing. It is also argued that at early stages of development, when a country is heavily dependent on agriculture, labour productivity is low and the economy is largely stagnant.

With increasing labour productivity, there is economic growth and higher wages. However, the prospects for rapid productivity growth in agriculture are limited, therefore, labour shifts to the non-agriculture sector (manufacturing and services), where there is greater scope for higher productivity and economic growth.

The structural change path of economic development was first derived by Arthur Lewis (1954), and focuses on the transformation of underdeveloped economies from agrarian to industrial and services economies. This process of labour transfer and output growth from the traditional agricultural sector to the modern urban industrial sector became the general development theory of most of the labour surplus developing nations in the 1960s and 1970s, and many still support it. This was subsequently confirmed by Kuznets (1957) and Chenery (1962).

Arrow (1962) and Kaldor (1967) extended the structural change theory and viewed the industry as the main engine of economic growth in the classical division of agriculture, industry and services. They argued that it is a central issue to understand the growth process of modern economies.

Timmer et al. (2012) further suggest that structural change is a process by which (a) the shares of agriculture in Gross Domestic Product (GDP) and employment fall over time, and (b) agriculture and the rural sector-based economy is replaced by an industrial and service sector-based economy, having an urban bias. Any existing dualism between the agricultural and the non-agricultural sectors and formal and informal sector gradually disappears over time.

This process of economic development is referred to as the ‘stylised pattern of structural change’. This stylised structural change development model has been historically experienced by developed countries, and lately by some select East Asian countries namely South Korea, Taiwan, Thailand, and Malaysia and China.

Structural Change In India’s Economy

The question of structural change in India has returned to the forefront of policy debates. The GDP contribution in the Indian economy, which was dominated by agriculture sector (52 per cent), followed by services (30 per cent) and industry (18 per cent) at the time it became a republic in 1950, also witnessed the stylised pattern of structural change between 1950 and 1980, when the primary sector share in GDP decreased by 17 percentage points and share of both industries as well as services increased by 10 percentage points and seven percentage points respectively.

Structure Change in India’s Economy (Share of Economic Sectors in % during 1950-2020). Source: CSO

However, after the eighties, from 1980 to 2020, the share of the agriculture sector in India’s GDP decreased again by 19 percentage points, but the share of industry decreased by five percentage points, and services led the growth of the country with a 24 percentage points change. Today, agriculture and allied sectors stand at 16 per cent, the industry at 23 per cent and services dominate at 61 per cent share of GDP.

These two periods confirm the contradictory pattern and the fact that the recent period is deviating from the ‘stylised pattern’ of structural change as discussed above. It was argued that India’s growth after the eighties was services-led rather than the industry or manufacturing-led growth.

Unlike the East Asian economies, the transition of services sector came at an early stage of development, opposing the historical ‘stylised pattern of structural change’, where the services sector has bypassed the industrial sector in the development. In particular, the manufacturing sector contribution in the economy is stagnant and hovering to around 25 per cent during the last four decades.

Several scholars have argued and explained that India’s service-led growth is a short-term phenomenon and unsustainable in the long run. On the other hand, many scholars claim a significant positive relationship between the share of services and growth. Some recent studies seek to reconcile these contrasting views by explaining ‘two waves of service-sector growth’.

The first wave consists of ‘traditional services’ — wholesale and retail trade, hotels and restaurants, and transport and storage, which emerged at an early stage of development. The second wave comprises of ‘modern services’ — communications (which include mobile telephone services), and business services (which include information technology services) that emerged at a relatively advanced stage of development.

India’s pattern of economic structure seems to confirm that the second wave of services growth led by ‘modern services’ emerged on account of technological progress. Modern services — Information and Communications Technology (ICT) — in India grew at a very fast rate in recent decades. It is not only contributing to the economy, but also has high spillover or multiplier effects in other sectors as well as backward and forward linkages.

These modern services are called the ‘growth engine’ of the Indian economy. Jha (2012) also stated that modern services are responsible for India’s emergence as a global economic power. Importantly, the communications service, with the advent of mobile telephony, has changed the definition of the service sector, which has characteristics of both manufacturers as well as services.

Structural Change In India’s Workforce

Changes in output structure have been accompanied by a corresponding shift of workforce, first to industry and then services. As a result, today, developed countries have a GDP structure similar to their employment structure — in each of them, agriculture accounts for less than five per cent, both in GDP and employment, and services contribute 70 to 75 per cent, and industry 25-30 per cent, both in GDP and employment. Inter-sectoral productivity differences are thus rather insignificant.

Over the past five to six decades, India’s labour market has been characterised by certain unique features accompanied by economic development. With the declining share of GDP from agriculture, there has been a decline in its share in employment as well. The share of agriculture in GDP has declined from 41 per cent in 1970s to 16 per cent in 2020s (decrease of 25 percentage points), whereas, its share in employment has shrunk from 74 per cent to 44 per cent during the same period (a decline of 30 percentage points).

The bulk of the workforce is engaged in Agriculture (44 per cent), however, contributes only 14 per cent to the national economy, reflecting low productivity and unemployment in the agriculture sector.

Structure Change in India’s Workforce. Source: NSSO

The industry contributed 26 per cent to GDP and employed 11 per cent of the workforce in 1970. In 2020, the respective figures are 24 and 25 per cent. Share of services in GDP has increased sharply from 33 per cent in 1970s to 61 per cent in 2020. Services share in employment has increased but to a much smaller extent, from 15 per cent to 31 per cent during the same period.

The decline in agriculture’s share in GDP and, to a lesser extent, in employment is indicative of structural transformation. However, this has led to a sharp difference between output per worker in agriculture and non-agriculture. This disparity has increased from 1:3 in 1970 to 1:6 at present.

The services sector has increased its share in GDP sharply, but its share in employment has only increased marginally over the years. The share of industry, both in GDP and employment, has increased almost equally but at a slower pace. Thus, the increase in disparity between agriculture and non-agricultural sectors has primarily been a result of the relatively slow growth of employment in the services sector despite a relatively high GDP growth and stagnant growth of manufacturing in the industrial sector.

The other important factor is employment elasticity (percentage change in employment associated with a one percentage point change in output or GDP growth, which indicates the ability to generate employment opportunity for the labour force in the development process) which is relatively high for the manufacturing sector only.

Since GDP growth in manufacturing has been almost stable, despite the higher employment elasticity, its employment growth has not been very high in the last three-four decades. Other sectors such as information technology and modern business services have a high growth rate and contribution to GDP, but employ only a few highly skilled individuals. This phenomenon has also been highlighted as ‘jobless growth’ by many scholars for the last two or three decades.

Way Ahead

In sum, structural transformation in India has been more successful in terms of GDP or output share, and substantially less in terms of employment share. Almost 44 per cent of India’s labour force is still engaged in the extremely low productive agriculture sector, and a large number of the remaining non-agricultural workers is employed in low-paying informal activities.

The Indian economy has already achieved some structural change of shifting output — if not employment — away from agriculture. However, the economy deviated from the classical pattern by relying on services rather than manufacturing to achieve this shift. The reliance on services to fuel growth so early in its economic development causes India to stand out, relative to other developed nations, including China and East Asia countries. There is a wide asymmetry between GDP and employment shares in the agricultural and services sectors, resulting in extremely large and increasing productivity variation between the two.

India’s obvious factor abundance in labour implies a comparative advantage in labour-intense activities. Instead, services-led growth has proven less labour-intensive than manufacturing-led growth. The industrialisation experience has been limited — particularly the manufacturing sector growth is still limited in terms of employment generation. In addition, the abundance of the low-skilled labour force is limiting India’s potential to generate more employment opportunities in emerging modern services such as information technology and other high-tech services sectors.

Moreover, the impact of the various initiatives of the successive governments for manufacturing and high productivity services-led growth has been limited. Focus on special economic zones (SEZs), ease of doing business and urbanisation strategy, along with infrastructure push and economic corridors (such as Delhi-Mumbai, Amritsar-Kolkata, Mumbai-Bengaluru) and foreign investments has not led to envisaged results. Major factors constraining these developments pertain to adequate governance, enabling ecosystem and management of basic resources — land, labour, capital and entrepreneurship.

The current government’s emphasis on the vision of ‘New India’ and ‘Atma Nirbhar Bharat’ with schemes such as Make in India, Skill India Mission, MSME, Startup India, Stand-Up India, Digital India, Smart Cities Mission, National Infrastructure Pipeline, the participation of private sector and foreign investors, innovation and vocal for local among others needs to be strengthened further.

Moreover, India needs a reinvigorated thrust for an effective and competitive economic reorientation to fully participate in and leverage from the global supply chain amidst the US-China trade war. With the advancement in technologies and as the fallout of the ongoing coronavirus pandemic, modern economic sectors in manufacturing and services harnessing ICT, Artificial Intelligence, blockchain, etc. leading to Industry 4.0, gig economy and future of work, need prioritisation.

The structural transformation of an economy is a complex process and its trajectory depends on the relative growth of productivity, employment, and value-added output in different economic sectors. It takes very different paths in different countries depending on how exogenous factors such as the global economic outlook, local politics, or technological changes shape up in different periods.

The potential for welfare improvements from successful structural change strategies has always been massive. Hence, the need of the hour is a national employment policy document with a proper implementation plan for efficaciously harnessing the structural change benefits in India’s economic development.

Note: This is the first article in the National Employment Policy (NEP) Article Series. It was first published here.

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An ambassador and trained facilitator under Eco Femme (a social enterprise working towards menstrual health in south India), Sanjina is also an active member of the MHM Collective- India and Menstrual Health Alliance- India. She has conducted Menstrual Health sessions in multiple government schools adopted by Rotary District 3240 as part of their WinS project in rural Bengal. She has also delivered training of trainers on SRHR, gender, sexuality and Menstruation for Tomorrow’s Foundation, Vikramshila Education Resource Society, Nirdhan trust and Micro Finance, Tollygunj Women In Need, Paint It Red in Kolkata.

Now as an MH Fellow with YKA, she’s expanding her impressive scope of work further by launching a campaign to facilitate the process of ensuring better menstrual health and SRH services for women residing in correctional homes in West Bengal. The campaign will entail an independent study to take stalk of the present conditions of MHM in correctional homes across the state and use its findings to build public support and political will to take the necessary action.

Saurabh has been associated with YKA as a user and has consistently been writing on the issue MHM and its intersectionality with other issues in the society. Now as an MHM Fellow with YKA, he’s launched the Right to Period campaign, which aims to ensure proper execution of MHM guidelines in Delhi’s schools.

The long-term aim of the campaign is to develop an open culture where menstruation is not treated as a taboo. The campaign also seeks to hold the schools accountable for their responsibilities as an important component in the implementation of MHM policies by making adequate sanitation infrastructure and knowledge of MHM available in school premises.

Read more about his campaign.

Harshita is a psychologist and works to support people with mental health issues, particularly adolescents who are survivors of violence. Associated with the Azadi Foundation in UP, Harshita became an MHM Fellow with YKA, with the aim of promoting better menstrual health.

Her campaign #MeriMarzi aims to promote menstrual health and wellness, hygiene and facilities for female sex workers in UP. She says, “Knowledge about natural body processes is a very basic human right. And for individuals whose occupation is providing sexual services, it becomes even more important.”

Meri Marzi aims to ensure sensitised, non-discriminatory health workers for the needs of female sex workers in the Suraksha Clinics under the UPSACS (Uttar Pradesh State AIDS Control Society) program by creating more dialogues and garnering public support for the cause of sex workers’ menstrual rights. The campaign will also ensure interventions with sex workers to clear misconceptions around overall hygiene management to ensure that results flow both ways.

Read more about her campaign.

MH Fellow Sabna comes with significant experience working with a range of development issues. A co-founder of Project Sakhi Saheli, which aims to combat period poverty and break menstrual taboos, Sabna has, in the past, worked on the issue of menstruation in urban slums of Delhi with women and adolescent girls. She and her team also released MenstraBook, with menstrastories and organised Menstra Tlk in the Delhi School of Social Work to create more conversations on menstruation.

With YKA MHM Fellow Vineet, Sabna launched Menstratalk, a campaign that aims to put an end to period poverty and smash menstrual taboos in society. As a start, the campaign aims to begin conversations on menstrual health with five hundred adolescents and youth in Delhi through offline platforms, and through this community mobilise support to create Period Friendly Institutions out of educational institutes in the city.

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A student from Delhi School of Social work, Vineet is a part of Project Sakhi Saheli, an initiative by the students of Delhi school of Social Work to create awareness on Menstrual Health and combat Period Poverty. Along with MHM Action Fellow Sabna, Vineet launched Menstratalk, a campaign that aims to put an end to period poverty and smash menstrual taboos in society.

As a start, the campaign aims to begin conversations on menstrual health with five hundred adolescents and youth in Delhi through offline platforms, and through this community mobilise support to create Period Friendly Institutions out of educational institutes in the city.

Find out more about the campaign here.

A native of Bhagalpur district – Bihar, Shalini Jha believes in equal rights for all genders and wants to work for a gender-equal and just society. In the past she’s had a year-long association as a community leader with Haiyya: Organise for Action’s Health Over Stigma campaign. She’s pursuing a Master’s in Literature with Ambedkar University, Delhi and as an MHM Fellow with YKA, recently launched ‘Project अल्हड़ (Alharh)’.

She says, “Bihar is ranked the lowest in India’s SDG Index 2019 for India. Hygienic and comfortable menstruation is a basic human right and sustainable development cannot be ensured if menstruators are deprived of their basic rights.” Project अल्हड़ (Alharh) aims to create a robust sensitised community in Bhagalpur to collectively spread awareness, break the taboo, debunk myths and initiate fearless conversations around menstruation. The campaign aims to reach at least 6000 adolescent girls from government and private schools in Baghalpur district in 2020.

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A psychologist and co-founder of a mental health NGO called Customize Cognition, Ritika forayed into the space of menstrual health and hygiene, sexual and reproductive healthcare and rights and gender equality as an MHM Fellow with YKA. She says, “The experience of working on MHM/SRHR and gender equality has been an enriching and eye-opening experience. I have learned what’s beneath the surface of the issue, be it awareness, lack of resources or disregard for trans men, who also menstruate.”

The Transmen-ses campaign aims to tackle the issue of silence and disregard for trans men’s menstruation needs, by mobilising gender sensitive health professionals and gender neutral restrooms in Lucknow.

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A Computer Science engineer by education, Nitisha started her career in the corporate sector, before realising she wanted to work in the development and social justice space. Since then, she has worked with Teach For India and Care India and is from the founding batch of Indian School of Development Management (ISDM), a one of its kind organisation creating leaders for the development sector through its experiential learning post graduate program.

As a Youth Ki Awaaz Menstrual Health Fellow, Nitisha has started Let’s Talk Period, a campaign to mobilise young people to switch to sustainable period products. She says, “80 lakh women in Delhi use non-biodegradable sanitary products, generate 3000 tonnes of menstrual waste, that takes 500-800 years to decompose; which in turn contributes to the health issues of all menstruators, increased burden of waste management on the city and harmful living environment for all citizens.

Let’s Talk Period aims to change this by

Find out more about her campaign here.

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A former Assistant Secretary with the Ministry of Women and Child Development in West Bengal for three months, Lakshmi Bhavya has been championing the cause of menstrual hygiene in her district. By associating herself with the Lalana Campaign, a holistic menstrual hygiene awareness campaign which is conducted by the Anahat NGO, Lakshmi has been slowly breaking taboos when it comes to periods and menstrual hygiene.

A Gender Rights Activist working with the tribal and marginalized communities in india, Srilekha is a PhD scholar working on understanding body and sexuality among tribal girls, to fill the gaps in research around indigenous women and their stories. Srilekha has worked extensively at the grassroots level with community based organisations, through several advocacy initiatives around Gender, Mental Health, Menstrual Hygiene and Sexual and Reproductive Health Rights (SRHR) for the indigenous in Jharkhand, over the last 6 years.

Srilekha has also contributed to sustainable livelihood projects and legal aid programs for survivors of sex trafficking. She has been conducting research based programs on maternal health, mental health, gender based violence, sex and sexuality. Her interest lies in conducting workshops for young people on life skills, feminism, gender and sexuality, trauma, resilience and interpersonal relationships.

A Guwahati-based college student pursuing her Masters in Tata Institute of Social Sciences, Bidisha started the #BleedwithDignity campaign on the technology platform Change.org, demanding that the Government of Assam install
biodegradable sanitary pad vending machines in all government schools across the state. Her petition on Change.org has already gathered support from over 90000 people and continues to grow.

Bidisha was selected in Change.org’s flagship program ‘She Creates Change’ having run successful online advocacy
campaigns, which were widely recognised. Through the #BleedwithDignity campaign; she organised and celebrated World Menstrual Hygiene Day, 2019 in Guwahati, Assam by hosting a wall mural by collaborating with local organisations. The initiative was widely covered by national and local media, and the mural was later inaugurated by the event’s chief guest Commissioner of Guwahati Municipal Corporation (GMC) Debeswar Malakar, IAS.

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