Updated: Aug 24, 2021
Structural transformation is the process of reallocation of resources across the sectors of agriculture, manufacturing and services, with the purpose of achieving modern economic growth. Essentially, it is the reallocation of workers and economic activity from low productivity sectors to high productivity sectors in an economy. In the path to achieve modernity in its economic processes, a country undergoes major transformation in the nature of its production and production relations, resulting in higher productivity across sectors and a higher standard of living for its inhabitants.
Historically, all countries that have achieved structural transformation have undergone two stages of changes -
first, a movement of labour from agriculture to manufacturing and services, and then a movement of labour from both agriculture and manufacturing to services.
India’s growth experience
The Indian economy has witnessed a growth trajectory that is very unique in the world. Before undergoing major economic reforms in 1991 which opened up the Indian economy to be commanded by the market, the Indian economy was highly regulated and was dominated by protectionist policies.
The agricultural sector was the primary contributor to the GDP until the 1980s, after which the service sector became the primary contributor to growth. The manufacturing sector’s contribution was the least as the sector was plagued by multiple problems. India’s growth during the period of 1950s to 1980s was stagnant at around 3.5%, popularly referred to as the Hindu rate of growth. However, after the economic reforms took place, the Indian economy witnessed a period of tremendous growth in the 2000s, with an increasing contribution of the service sector to growth. The contribution of the service sector increased from 35% in 1970 to 53% in 2012. Manufacturing sector however remained stagnant, witnessing a growth from 19% in 1970 to 23% in 2012. Agricultural sector witnessed a huge decline in its contribution to GDP from 40% in 1970 to 16% in 2012.
The change in the sectoral contribution to GDP indicates that we are in the second stage of structural transformation of the Indian economy, unless we look at the employment trends of the economy. Till date, agriculture employs the greatest amount of the workforce, although the share of employment in agriculture has reduced from 74% in 1972-73 to 46% in 2016-17. The share of manufacturing in employment has increased from 11% in 1972-73 to 24% in 2016-17. The service sector’s share in employment has grown from 15% in 1972-73 to 30% in 2016-17. Although the share of manufacturing and services has increased in the Indian economy, agriculture’s share in employment has witnessed a very slow decline. This phenomenon has led many to call India’s structural transformation to be ‘stunted’.
The features of this stunted growth experience have been:
Jobless growth- Although the Indian economy witnessed tremendous increase in growth rates in the first decade of the 21st century, the total amount of people engaged in the workforce has declined over time. This indicates that the increase in growth has not been accompanied by an increase in employment opportunities. This growth has been productivity driven (primarily in the service sector) and not employment driven, which is one of the reasons for this stunted structural transformation.
Absence of a manufacturing base – All countries that have progressed on the path of structural transformation have had to develop a strong manufacturing base, one that is labor absorbing. The primary reason for the growth of the Chinese economy was a strong labor absorbing manufacturing base which helped the movement of the workforce out of the low-productivity agricultural sector. India’s unique growth path jumped from depending upon the agriculture sector to the service sector instead, as the driver of economic growth. Even though development of a manufacturing sector was an important part of the planning decisions after Independence, the policies never manifested into the actualization of that goal.
Casualization of workforce – Workforce casualisation is the process in which employment shifts from a preponderance of full-time and permanent positions to casual and contract positions. The neoliberal reforms of 1991 and the lack of government interest in creating a skilled workforce led to a perpetual casualization of the work and the workforce. This casualization of work across manufacturing and services disincentivized the workers from agriculture to migrate to these sectors.
Larger non-farm rural sector - The decline in agriculture’s share in employment has been accompanied by an increase in the rural non-farm sector employment, indicating that the workforce out of agriculture did not move to high productive jobs in urban areas but stayed back in rural areas. This was accompanied by a shift to self-employed work in the non-farm sector, thereby being another constraint to a typical structural transformation.
Neoliberal economic policies and the market economy have undoubtedly created several constraints plaguing Indian growth. The informalization of work processes and the unequal distribution of economic resources are among the various challenges that can be attributed as the vices of the market economy. But these constraints alone do not explain the stunted growth of the Indian economy. Upon deeper introspection, there are multiple factors internal to the political economy of the nation that have been the reason for an atypical structural transformation. These reasons are –
The Caste System
India is unique not only in its path of structural transformation, but also in its cultural practices intrinsic to the country. The caste system is a practice of social segregation, in which people are categorized into hierarchical compartments of Brahmins, Kshatriyas, Vaishyas and Shudras. Nowhere else in the world is such a system practiced and therefore the uniqueness of this system can explain some of the distinctive features of the Indian Economy. The caste system is a highly oppressive structure, dividing people from birth into categories based on their occupation. The defenders of the caste system often argue that the caste system is nothing but the division of labour in a society, and therefore a necessary part of societal development. However, Dr. B.R Ambedkar, the greatest visionary the country has ever produced, argued in his speech The Annihilation of Caste that,
“Caste System is not merely division of labour. It is also a division of labourers. Civilized society undoubtedly needs division of labour. But in no civilized society is division of labour accompanied by this unnatural division of labourers into watertight compartments. Caste System is not merely a division of labourers which is quite different from division of labour—it is a hierarchy in which the divisions of labourers are graded one above the other. In no other country is the division of labour accompanied by this gradation of labourers.”
This stratification of people on the basis of occupation affects the economy in multiple ways.
Labour Mobility – Caste has been identified as one of the biggest constraints to mobility of labour from rural to urban areas. Caste based credit groups, which mainly function as self-help groups among people of the lower castes in the rural areas to provide them protection from financial burdens, acts as one of the biggest barriers to migration of the workforce.
Reluctance to shift jobs – The caste system has historically defined certain occupations for people belonging to certain castes. This is mainly true for the Dalit community, who have been oppressed for decades by being made to perform inhuman work like manual scavenging. Due to the fear of retaliation by the members of other castes, there is a reluctance in people from the lower castes to shift to an occupation different from their traditionally assigned one.
Low level of human capital formation – The level of education and skill development, which are crucial in increasing the productivity of a workforce, have been found to be lower for the members of the Scheduled castes and Scheduled Tribes, as compared to the members of the upper castes. Along with education, the health standards of these communities have also been found to be lower, with high mortality rate and lower life expectancy.
For the reasons mentioned above, and many more, the presence of a hierarchical division on the basis of caste has therefore been a serious impediment to the economic prosperity of the Indian Economy.
Concentration of Industrial Power
The manufacturing sector of the Indian economy has an interesting characteristic – the absence of medium manufacturing sectors. There are either small manufacturing plants or large ones. The large manufacturing plants are mostly either state owned or run by business groups. This concentration of ownership in the large manufacturing sector is a barrier to free entry of other firms into the formal manufacturing market, which may reasonably explain the low contribution of manufacturing to the growth of the economy.
High rate of population growth
The enormous population and high population growth rate have been reasons for low standards of living for the Indian populace. Even though there has been migration from rural to urban areas, the poverty rate has been rising in the urban areas. The increase in population density in urban areas and rising poverty has therefore made the prospect of migration of workers from rural to urban areas less lucrative, and there has thus been a shift to self-employed work in the rural areas rather than low productivity casual jobs in the urban areas.
Absence of comprehensive Land reforms
The Indian experience of Land reforms has been a rather failed one, due to the absence of comprehensive policies guiding fair distribution of land and better tenancy rights. The only reforms successfully undertaken in India was abolition of intermediaries as rent collectors and the abolition of the Zamindari system. The reforms pertaining to tenancy regulations and distribution of surplus land to the landless never occurred in the country as whole (except for the states of West Bengal and Kerala, which were governed by socialist parties). The absence of complete land reforms has been one of the reasons for low productivity in the agricultural sector, as well as low migration from agriculture to manufacturing and services.
The growth process of the Indian economy has been stalled by different reasons at different points in time, some pertaining to the vices of the market economy, and some occurring due to domestic inefficiencies, but the problems intrinsic to the political economy of India, as mentioned above, have been the biggest invisible reasons for the slow and stunted structural transformation of India. The costs of ignoring the socio-political context in economic policy has been huge for India and hence any policy aimed at improving the efficiency of the economy needs to take that into account for it to produce the desired results.
Caste and the Indian Economy https://www.histecon.magd.cam.ac.uk/km/MunshiJEL2.pdf
Structural Transformation of India: A Quantitative Analysis https://journals.sagepub.com/doi/abs/10.1177/0019466219858852
India under Neoliberal Transition: Development, Displacement and Labour https://www.researchgate.net/publication/289980133IndiaunderNeoliberalTransitionDevelopmentDisplacementandlab
India’s Atypical Structural Transformation
The Stunted Structural Transformation of the Indian Economy: Agriculture,Manufacturing and the Rural Non-Farm Sector
The determinants of structural transformation in Asia: A review of the literature https://www.adb.org/sites/default/files/publication/182271/ewp-478.pdf