Structural Change in Indian Economy

The term “structural change” refers to the major changes in the relative importance of the main sectors of an economy (agriculture, industry, services, and so on) in the course of economic growth. Structural change has often been defined as a process by which the transfer of economic benefits is evidenced in terms of major changes in the relative sectoral distributions of income and employment in the economy. Economic development has historically been associated with ‘structural changes’ in the national economies.

Structural changes in an economy can be studied concerning different outcomes like output, employment, capital investment, and consumption. Various dimensions in which their structure can be analysed include sectors and product groups, space–rural–urban and interregional –, distribution across the size of production units, income groups and consumption expenditure classes of households, technological and productivity variations across sectors and activities, different sizes and locations, and earning differences across activities, skills, gender, and social groups. In other words, an analysis of structural changes accompanying economic growth brings out various manifestations of the composition and distribution of growth.

India’s unconventional transition from agriculture to services bypassing a significant industrial phase:

(Source: Invest India)

The Indian Economy has been called an agro-economy because the agriculture sector is one of the major contributors to the country’s total GDP. Also, the sector provides jobs to more than half of the country’s population. India ranks second worldwide in farm outputs. As per the Indian Economic Survey 2020 -21, agriculture employed more than 50% of the Indian workforce and contributed 20.2% to the country’s GDP. However, agriculture’s share in India’s economy has progressively declined from 35% in 1990-91 to 15.4% in 2022-23 due to the high growth rates of the industrial and services sectors. A major concern for Indian agriculture is the very low productivity of this sector. The land has strong population pressure to feed a large number. Due to rural population pressure, the available land area per capita is very small and there is no benefit to obtaining higher yields. Given this, an economy that is characterised by a predominant share of agriculture in income and employment is characterised as ‘under-developed’. However, exceptions to these economies like New Zealand, Argentina, etc. have been able to attain developed status when they diversified from agriculture to allied activities like poultry animal husbandry etc. However, their share of agriculture in GDP has shrunk over time to indicate their operations are modernised to become industries. Improving the irrigation facilities, Agriculture education, provision of better quality manure seeds, and availability of infrastructure, such as roads, ports, and power supply, could help attract more investment and businesses to the Agriculture sector and value add to GDP. This could involve building new infrastructure or upgrading existing infrastructure would make it the key vehicle for employment generation in rural India.

Service sector:

The service sector has been a major contributor to India’s GDP and to its growth. It is the second largest employer after agriculture. The service sector started to grow in the mid-1980s, but growth accelerated in the 1990s when India’s economy was liberalized in 1991, which led to an increase in foreign investment. The service sector was able to take advantage of this liberalization, particularly in the areas of IT and BPO. The exponential growth of services in India can be credited to several factors. Primarily, advancements in technology and communication have facilitated the rise of outsourcing, leading to a surge in IT, finance, and other service sectors. Moreover, India’s large English-speaking workforce and relatively lower labour costs have made it an attractive destination for global businesses seeking skilled services. In addition to it, government policies and investments in education have further pushed the service sector’s expansion.

A combination of unfavourable factors played spoilsport for manufacturers. The stagnation of India’s manufacturing sector can be attributed, in part, to the comparatively higher input costs, Poor infrastructure related to electricity, water, transport, routes, and storage facilities has also been cited as a cause of limited investment. Lack of trained and skilled workers in areas such as advanced manufacturing techniques, automation, and specialized operations may contribute to lower productivity levels. Further, the prevalence of informal employment in the manufacturing sector can hinder productivity growth.

Despite the service sector has been a major contributor to India’s GDP and to its growth, employment growth in the Indian services sector has been quite modest. Without a strong manufacturing sector, India may face challenges in generating employment and achieving balanced development, potentially hindering its journey towards becoming a developed nation.

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