Seminar on structural transformation of indian economy

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PRESENTOR Sravanthi.K.PALB2004.

THE STRUCTURAL TRANSFORMATION OF INDIAN ECONOMY: A CRITICAL ANALYSIS

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1. Structure of an economy

2. Structural transformation and its process

3. Structural transformation of Indian economy

4. Rising Importance of Rural Non-Farm Sector

5. Vision for Indian agriculture

6. conclusion

Outline

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Structure of an economy

Three sector hypothesis - Colin Clark and Jean Fourastie.

1. Primary: Making direct use of Natural Resources.

2. Secondary: Finished and Tangible Product

3. Tertiary : Intangible Goods

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Structural transformation

• Transfer of resources from some sectors to other in a system necessitated by fundamental changes in it’s policies and objectives.

• Characteristic of the development process. • The cause and effect of the economic growth

Process - Fourastie The distribution of the workforce among the three sectors progresses through different stages 1. Traditional civilizations2. Transitional period3. Tertiary civilization

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Structural transformation - Peter Timmer (2012).

Four interrelated processes1. A declining share of agriculture in gross

domestic product (GDP) and employment. 2. The rise of a modern industrial and service

economy.3. A demographic transition from high to low

rates of births and deaths. 4. The rapid process of urbanization as people

migrates from rural to urban areas.

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How structural transformation taking place in India ?

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Step 1 & 2:A declining share of Agriculture in Gross Domestic

Product (GDP) and Employment. The rise of a modern industrial and service economy.

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Fig. 1: India’s sectoral Share in GDP (%).

1972‐73

1977‐78

1983-84

1987‐88

1993‐94

1999‐00

2004-05

2009-10

0

10

20

30

40

50

60

70

41 40

3732

30

2520 15

23 24 24 25 25

25 26 26

36 3639

43 4550

5459

primary sectorSecondary SectorTertiary Sector

Source: Papola and Sahu, 2012.

Perc

enta

ge (%

)

10Source: Haltmaier, 2013.

Fig. 2: Chinese sectoral Share in GDP (%).

50%

40%

8%

40%

30%

Perc

enta

ge (%

)

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Fig. 3: India’s sectoral share in employment (%)

1972‐73

1977‐78

1983-84

1987‐88

1993‐94

1999‐00

2004-05

2009-10

0

10

20

30

40

50

60

70

8074 71

6965 64

6056

51

11 13 14 17 1516 19

2215 16 18 1821 23

25 27

primary sectorSecondary SectorTertiary Sector

Source: Papola and Sahu, 2012.

Perc

enta

ge (%

)

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Fig. 4: China’s sectoral share in employment (%)

Source: Haltmaier, 2013.

Perc

enta

ge (%

)

38%

24%

12%

18%

70%

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Fig 5: Share of agriculture in labour force and GDP in India

1972‐73

1977‐78

1983-84

1987‐88

1993‐94

1999‐00

2004-05

2009-10

0

10

20

30

40

50

60

70

8074

71 6965 64

6056

51

41 4037

32 3025

2015

share of labour forceshare of agriculture in GDP

Source: Papola and Sahu, 2012.

Perc

enta

ge (%

)

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Fig 6: Agriculture and non agriculture output per worker in India

Source: Binswanger, 2012.

Ag. Output per Ag. worker

Non Ag. Output per non Ag. Worker.

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Why there is more divergence ?

• Manufacturing sector attracts mainly skilled labour.

• Low literacy levels.• Rigid labour laws.

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Table 1: Growth of Agriculture and Agricultural Productivity .

Indicator Growth rates during different decades (%)

1960-70 1971-80 1981-90 1991-2000 2001-09

Agricultural GDP growth

3.8 1.5 3.3 2.7 2.8

Growth of agriculture output/worker

0.6 0.4 2.3 1.2 1.1

Total factor productivity (TFP) growth in India

- 0.8 2 1.5 1.9

TFP growth in China

- - 2.8 4.2 2.7

Source: Binswanger, 2013.

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Step 3A demographic transition from high to

low rates of births and deaths.

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Fig 7: Birth and death rates over the years in India.

CBR CDR0

5

10

15

20

25

30

24

9

23

8

22

8

21

7

1996-01 2001-06 2006-11 2011-16

Note: CBR- crude birth rate, CDR- crude death rate.Source: http://www.indiastat.com

Perc

enta

ge (%

)

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Fig 8: Population growth rate, India and selected countries 2000-2010

Source: http://censusindia.gov.in

0.53%

1.64%

0.7%

1.2%

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Step 4The rapid process of urbanization as people

migrates from rural to urban areas.

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Table 2: Size and growth rates of migrants by streams in India.

Migration streams2001 (in million)

Percentagedistribution

Sex-ratio(males per

1000 females)

Growth rate (%)

1981-1991

1991-2001

Intra stateRural to rural 48.8 60.6 257 0.2 12.2Rural to urban 14.2 17.6 842 6.7 7.3Urban to rural 5.2 6.5 651 -4.8 1Urban to urban 9.8 12.1 796 -11.2 23.6Inter-stateRural to rural 4.4 26.6 648 3.4 54Rural to urban 6.3 38.2 1480 20.1 76.5Urban to rural 1 6.0 984 9.6 11.2Urban to urban 4.4 26.7 970 6 24.3Source: Bhagat and Mohanty ,2009.

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Figure 9: Trends in labour participation rates in India

1983-84 1993-94 1999-00 2004-05 2009-100

10

20

30

40

50

6054.7 55.3 53.1 54.6 54.7

51.252.1

51.854.9 54.3

3432.8

29.9

32.7

26.1

15.1 15.5 13.9 16.6 13.8

rural maleurban malerural femaleurban female

Source: Deepak and Vivek, 2012.

Perc

enta

ge (%

)

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Table 3: Average daily real wage rate for workers in India.

Year Rural Urban

Male Female Male FemaleRegular salaried2004-05 145 86 203 1532009-10 165 103 260 213Growth rate 2.8 4.2 5.6 7.8Casual2004-05 55 35 75 442009-10 67 46 91 53Growth rate 4.5 6.2 4.2 4.1

Source: Binswanger, 2013.

in 2004-05 Prices (Rs)

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Fig 10: Dropout Rates of girls at Schools in India

(I-V) Classes (I-VIII) Classes (I-X) ClassesPrimary Elementary Secondary

0

10

20

30

40

50

60

70

80

90

54

7585

39

63

75

41

58

70

25

51

64

27

4452

1983-84 1993-94 1999-00 2004-05 2009-10*

Source: http://www.indiastat.com

Perc

enta

ge (%

)

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Structural transformation has been very slow

Agriculture productivity growth has slowdown except in recent years.Increasingly divergence in labour productivity between agriculture and non agriculture. participation of labour force is still higher in rural areas than in urban areas.Rural-urban migration is very slow

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The puzzle: urban and rural poverty have not diverged !!

Table 4: Changes in rural and urban poverty rates year Poverty Ratio (%) Number of Poor (million)

rural urban rural urban total

1993-94 50.1 31.8 328.6 74.5 403.7

2004-05 41.8 25.7 326.3 80.8 407.1

2011-12 25.7 13.7 216.5 52.8 269.3

Difference between 1993 to 2011

24.4 18.1

Note: Poverty line using Tendulkar methodology 2011-12. rural-Rs. 816 per capita /month,Rs, urban-1,000 per capita/ month.Source: Government of India Planning Commission, 2011-12.

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Table5: Consumption inequality in India

Gini coefficient of distribution of consumption

1983-84 1987-88 1993-94 2004-05 2009-10

rural 0.3 0.3 0.28 0.3 0.28

urban 0.3 0.35 0.34 0.37 0.37

urban-rural ratio of mean consumption (constant prices)

1.54 1.44 1.64 1.72 1.69

Source: Binswanger, 2013.

Little urban/rural divergence in per capita consumption

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Figure 11: Unemployment Rate (CDS) for All Workers (in %)

rural male rural female urban male urban female0

2

4

6

8

10

12

14

7.5

9 9.2

11

5.6 5.66.7

10.4

7.2 7 7.3

9.4

88.7

7.5

11.6

5.56.2

4.9

7.9

1983-84 1993-94 1999-00 2004-05 2011-2012Source: Chowdhury and Subhanil,

2011.

Perc

enta

ge (%

)

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Drivers of Rural Poverty Reduction

Why there is not more divergence ?

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Table 6: Elasticities of poverty with respect to urban and rural growth: 1951-2006

National poverty

Urban poverty

Rural poverty

Headcount index

Urban growth Pre-91 -0.09 -0.85 0.13

Rural growth Pre-91 -1.11 -0.35 -1.29

Urban growth Post-91 -1.21 -1.26 -1.26

Rural growth Post-91 -0.66 -0.08 -0.9

Source: Datt and Ravallion, 2009.

Change drivers of decline in rural poverty

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Table 7: Factors affecting rural poverty and agricultural wages

Notes: absolute value of t statistics in parentheses * significant at 10%; ** significant at 5%; *** significant at 1%. (Source: Himanshu et.al, 2011.)

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Table 8: Distribution of workers by type of employment and sector (in million)

Sector 1999-2000 2004-05

Informal workers

Formalworkers

Total Informalworkers

Formalworkers

Total

Informal sector

341.28 (99.6)

1.36 (0.4)

342.64 (100)

393.47(99.64)

1.43 (0.36)

394.9(100)

Formal sector

20.46 (37.8)

33.67 (62.2)

54.12 (100)

29.14 (46.58)

33.42(53.42)

62.57(100)

Total 361.74 (91.17)

35.02 (8.83)

396.76(100)

422.61 (92.38)

34.85(7.46)

457.46(100)

Source: Binswanger, 2012.

Most employment is informal

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Characteristics of rural non farmemployment

6 out of 10 new jobs in rural areas are now in non farm sectorThey offer significantly higher wages than farm labourMost jobs are casual jobTrade and transport, construction, and services are growing especially fastThese jobs go mostly to young men with some education, and women have a hard time getting themFeminization of agriculture

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Characteristics of rural non farm

employment cont…In first half of last decade, rural non-farm self-employment increased by 8 million2.2 million was accounted for by retail trade,1.5 million by manufactured of wearing apparel,1 million by land transport.Other large increase in form of maintenance and repair of motor vehicles, hotels and restaurants and STD /PCO booths,

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Rising Importance of Rural Non-Farm Sector

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Table 9: Trends in non-farm employment and in national, rural non-farm and agricultural GDP (annual growth rate(%))

Year Non-farm employment

GDPN Rural non-farm GDP

Agriculture GDP

1983-1993 3.5 5.2 6.4 2.9

1993-2004 4.8 6 7.2 1.8

1983-2004 3.3 5.8 7.1 2.6

Note: GDP at factor cost at 1993-94 prices. GDPN is non-farm GDP in the country, agriculture GDP is GDP originating in agriculture, forestry, and fishing, and non-farm GDP is defined as a residual. Source: Binswanger, 2013.

The rural non-farm sector: the major source of rural income and employment growth

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01020304050607080 72

7 7 7 7

62

5 8

20

5

1999 2007

Mean incomes sharesPer capita income 1999: Rs 8,4982007 : 12,370

Source: Binswanger, 2013.

Fig 12: Change in composition of rural incomes in India

Growing income and changing compositionPe

rcen

tage

(%)

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Fig.13: Comparison of composition of net income per farm family among irrigated and rainfed farmers.

CIA GIA RFA0

10

20

30

40

50

60

70

80

5560

2

14 1512

27

21

69

3 4

16

Net returns from crops

Net returns from livestock

Net returns from non farm income

Total benefit from gov-ernment programmes

CIA: Canal irrigated area, GIA: Ground water irrigated area, RFA: Rainfed areaSource: Sravanthi, 2012.

Perc

enta

ge (%

)

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India’s structural transformation is stunted

Much of the growing labour force is stuck in rural areasThe largest growth in non agricultural employment is in the rural non-farm sector rather than in urban areas.Less secure jobs While the urban-agricultural productivity differential has been rising, rural urban income difference grew little on account of non-farm growth

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Vision for Indian agriculture

Indian structural transformation will continue to be stuntedThere are few prospects for rapid growth of labour intensive manufacturingRapid growth of rural labour will continueWomen will continue to face poor urban and non-farm employment prospectsFeminization of agriculture will continue.

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Optimistic scenario for rural incomes

1. Faster agricultural growth viaHigher pricesFaster productivity growthIrrigation growth based on water use efficiency

2. Higher farm and nonfarm wages3. Continued diversification to high valued

commodities and into the non-farm employment and self employment.

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Major reforms in policies and programmes are required

Productivity growth needs to be sustained at very high levels

Larger, better financed, more diversified and more accountable agricultural extension system

Greater role for private sector in both research and extension

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Slowdown in irrigation growth needs to be reversed

From construction focused canal irrigation to service oriented system of water distributionOften in pipes rather than in secondary and tertiary canalsIn combination with sprinkler and drip irrigationReform and expansion of electricity supply for irrigation (eg. Gujarat)Water harvesting and groundwater rechargeImprovements in groundwater management

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Agricultural subsidies: inefficient, poorly targeted and environmentally harmful

From subsidies linked to inputs and outputs to direct paymentsEspecially important if urban-rural income partly deterioratesWhile this is beginning to happen in fertilizersIt should be extended to electricity and food subsidies.

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The marketing and value chain

This sector is modernizing very rapidly

Remaining constraints in marketing systems need to be eliminated

Efficient farmer organizations and contract farming need to develop much faster

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Agricultural and rural development administration is too centralized

Only a few states have implemented rural decentralization properly (kerela, karnataka)states rely far too much on central finance for agricultural rural development finance even though these responsibilities are assigned to themThe resulting implementation architecture is top down and fragmented into multiple, overlapping programsAccountability to population and within the system is minimal, corruption and inefficiency are rampant.

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Conclusion

Structural transformation sharply constrained by the weakness of urban growth and employment A positive outcome for rural areas depend on continued urban spillovers better Agricultural Rural Development policies, institutions and programmes

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