INDIA

AND THE WORLD

ECONOMY

LECTURE 6
DILEMMA OF STRUCTURAL TRANSFORMATION
IN INDIA
SUMMARY FROM LECTURE 5

• History of Economic Growth

• Structural Transformation:

– Lewis’ Theory

– Relative movements in employment and value addition in

agriculture: World Experience vs India’s Experience

– Trends in agricultural growth in India

– Commodity Price movements in Agricultural market

TRENDS IN AGRICULTURAL GROWTH IN INDIA

Source: Indian Economic Survey 2016-2017

CHRONOLOGY OF AGRICULTURAL GROWTH IN INDIA

• Before the green revolution, agriculture growth was about 2%.

– India had periodic food shortages. 1956-66 saw two successive
famines.
– We depended on the US for food aid

• Then we had green revolution and agricultural growth was up to 3%

– It also led to some crop diversification
– Ensured food security; greater resilience to droughts

• Again for a brief period in the 2000s agriculture goes up

– Commodity-price induced dynamism

• And then back to 2 – 2.5% agricultural growth more recently

COMMODITY PRICE INDUCED DYNAMISM
COMMODITY PRICE INDUCED DYNAMISM

• Boom period of 2006-2009: Demand Shock

– World price goes up
– Production goes up
– Tradable crops benefit
– Farmers benefit from increasing world Prices and increasing production
– Unambiguous increase in agricultural income

• Drought, 2014-2015: Negative Supply Shock

– supply shifts up
– Q goes down and P goes up
– Effect on agricultural income is uncertain
– Non-tradable crops affected

• Good rain 2016-2017: Positive Supply Shock

– Q goes up but P goes down.
– Effect on agricultural income is uncertain
– Non-tradable crops affected
CHRONOLOGY OF AGRICULTURAL GROWTH

Source: Indian Economic Survey 2016-2017

CHRONOLOGY OF POVERTY REDUCTION
AGRICULTURAL GROWTH POVERTY REDUCTION

Estimates provided by Janvry and Sadoulet, 2009 suggest:

• 1% growth in agricultural production

 leads to non-agricultural growth by 2-3%
 yields a 2.7% increase in income of the lowest 3
income deciles in developing countries

• Agriculture is 2.5 to 3 times more effective in increasing

income of the poor than is non-agricultural investment
– Caveat: growth in agricultural productivity also
enables growth in industry
FROM AGRICULTURE TO INDUSTRY

• Recall:
– Lewis Theory: Economic Development is about transitioning
from low productivity traditional sectors (agriculture) to high
productivity modern sectors

• What is the world wide experience of structural transformation in

the process of moving from agriculture to manufacturing?
STRUCTURAL TRANSFORMATION: EXPERIENCE

Source: Herrendorf and Valentinyi, 2014

TRANSFORMATION VIA AGRICULTURE

• World experience
– A declining share of employment (& VA) in agriculture
– An increasing share of employment (& VA) in services.
– For manufacturing, employment share (& VA) first increases
and then declines
– Agricultural productivity growth is a precondition for
structural transformation historically

• Modest productivity growth in agriculture in India.

– Transition from agriculture to industry is also a mixed story in
India compared to the history of high income nations.
 IS MANUFACTURING SPECIAL?

“Since the industrial revolution, no country has become a major economy

without becoming an industrial power.”
– Lee Kuan Yew (delivering the Jawaharlal Memorial Lecture in New
Delhi, 2005)

• Backed up by data:
– All rich countries (GDP pc >$24,000 in 2005 prices) have
experienced manufacturing employment shares > 20%

• Can today’s developing economies achieve high-income status

without first building large manufacturing sectors?
– practically every economy that enjoys a high income today
experienced a manufacturing employment share in excess of 20%
MANUFACTURING AND PROSPERITY

• What does evidence suggest? (See graph on next slide)

• Panel A:
– X-axis measures the level at which manufacturing employment
shares peaked (in different years for different countries, 1970-2010);
Y-axis measures income
– Strong positive relation between economies’ income per capita
in 2005–2010 and the peak historical manufacturing
employment share.

• Panel B:
– X-axis measures the level at which manufacturing output shares
peaked (in different years for different countries, 1970-2010); Y-axis
measures income
– The relationship of income per capita with output shares is also
positive, but much weaker.
PEAK MANUFACTURING EMPLOYMENT AND
SUBSEQUENT PROSPERITY

Felipe etal 2014

TAKEAWAY FROM GLOBAL EVIDENCE

• Manufacturing employment share are much stronger

predictors of eventual prosperity than manufacturing
output share.
 WHAT IS HAPPENING WITHIN INDIA?

• Redoing the exercise for India

Even within India the relationship between a state’s peak

manufacturing employment share and income is positive

i.e. a state that has achieved a high peak in manufacturing- employment is

more likely to have a higher GDP.
WHAT IS HAPPENING WITHIN INDIA?

States with higher past peak employment shares tend to be richer today
 WHAT IS HAPPENING WITHIN INDIA?

• Redoing the exercise for India

• Even within India the relationship between a state’s peak

manufacturing employment share and income is positive

• i.e. a state that has achieved a high peak in manufacturing- employment

is more likely to have a higher GDP.
 IS MANUFACTURING SPECIAL?

• From Kaldor to Rodrik, manufacturing has had a privileged role among

economists [Theoretical]:
– the sector with IRS: output generates productivity growth and positive
productivity spillovers on other sectors
– Exportable
– Skill creation

• More recently Danny Rodrick has added a new dimension to

Manufacturing [Empirical]:
– Manufacturing provides an automatic ladder for productivity growth.
– Unconditional convergence in manufacturing across various nations
– Historically, manufacturing allowed for unconditional convergence with
high-income countries
UNCONDITIONAL CONVERGENCE IN
MANUFACTURING

Source: Rodrik, 2013

 SUMMARY: MANUFACTURING AS A PATHWAY TO
ECONOMIC DEVELOPMENT

• Manufacturing became a powerful escalator of economic

development for low-income countries for 3 reasons.
– It was relatively easy to absorb technology from abroad and
generate high-productivity jobs.
– Manufacturing jobs did not require much skill: farmers could be
turned into production workers in factories with little investment
in additional training.
– Manufacturing demand was not constrained by low domestic
incomes: production could expand virtually without limit,
through exports.
WHICH SECTOR TO PUSH FOR STRUCTURAL
TRANSFORMATION ?

• Originally structural transformation meant movement from

traditional(agriculture) to modern(manufacturing),
– now modern could also be services.

• Many emerging markets’ growth driven by services today.

– Hence it’s important to ask: Does it matter whether we choose
manufacturing or services?

• Some underlying characteristics that makes an industry special.

Manufacturing or services.

• To answer this question we need to figure out what are the desirable
characteristics for a sector to exhibit.
 WHAT ARE THE DESIRABLE FEATURES FOR A
SECTOR TO EXHIBIT?

• High level of productivity

− The modern sector has a higher level of productivity that is why we
want to switch to the modern sector
− This provides a level effect

• Unconditional convergence
− must behave like a ladder for productivity growth
− a change or growth effect, a dynamic effect

• Expansion of the dynamic sector

− Tradability: i.e. export implies no need to be constrained by the
domestic demand.
− Alignment with Comparative Advantage: For example, if a country has
relatively more high skilled labor but the sector that leads to the
unconditional convergence are the low skilled sectors, then the country
cannot expand in that sector.
 WHICH SECTOR HAS THESE PROPERTIES?

• It is through this lens, rather than through the lens of

manufacturing and services, that we need to examine underlying
sectors

• In other words, the more relevant question now is:

which sectors have these desirable features?
WHICH SECTOR HAS THE DESIRABLE PROPERTIES
IN INDIA?

• Does Manufacturing satisfy the property of high productivity?

FORMAL MANUFACTURING IS HIGH PRODUCTIVITY

Source: Amirapu and Subramanian, 2015

Unregistered(Informal) manufacturing about 7 times less productive

 WHICH SECTOR HAS THE DESIRABLE PROPERTIES
IN INDIA?

• Registered Manufacturing satisfies the property of high

productivity
– Table shows in each sector, what is the value added (VA) per worker
and the rate of growth in these sectors
– There is a big difference between registered(formal) and
unregistered(formal) manufacturing. Not all of them have the
desirable properties
– Registered manufacturing has a worker productivity level which is
more than 6 times that of unregistered manufacturing

• Does it satisfy Unconditional convergence?

MANUFACTURING EXHIBITS DOMESTIC CONVERGENCE

Not just international, but domestic convergence too

WHICH SECTOR HAS THE DESIRABLE PROPERTIES IN
INDIA?

• It satisfies Unconditional convergence

– The important question for us is that is there convergence
internationally as well as domestically?
– Manufacturing has convergence within India (and also
internationally)
– Thus registered manufacturing does have the property of
dynamism

• Expanding ?
REGISTERED MANUFACTURING IS NOT EXPANDING

Source: Amirapu and Subramanian, 2015

Employment and output share of registered manufacturing in India

is almost stagnant
 WHICH SECTOR HAS THE DESIRABLE PROPERTIES IN
INDIA?

• Registered Manufacturing satisfies the property of high productivity

• It satisfies Unconditional convergence

• But expanding very slowly or not at all

– Some employment growth observed in unregistered manufacturing
but it is much less productive than registered manufacturing