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2015,N O.23 ( Posted 2 0 1 5 1 0 0 2 )

IndiasAtypicalStructuralTransformation
byManishaGoelandPaulinaRestrepoEchavarria

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DoesIndiahaveastagnantmanufacturingsectororan
exceptionallyproductiveservicessector?
Ascountriesdevelop,theyundergoastructuraltransformation.Structural
transformationisthereallocationofeconomicactivityacrossthebroadsectors
ofagriculture,manufacturing,andservicesthataccompaniestheprocessof
moderneconomicgrowth.
Longtermevidencefromdevelopedcountriesindicatestwostagesofstructural
transformation:labormoves(i)outofagricultureintomanufacturingand
servicesandthen(ii)outofbothagricultureandmanufacturingintoservices.
Figure1showsthebehavioroflaborsharesduringtheU.S.structural
transformationover1869to2008.Thebreakfromthefirststagetothesecond
stageoccurredaround1970.Thisbehaviorisaccompaniedbychangesinthe

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sharesofGDP:Theagricul
t uresharesteadilydeclinedovertheperiod.The
manufacturingandservicessharesstayedrelativelyconstantuntilthe1960s,but
thenmanufacturingbegantodecline,whileservicescontinuedtoincrease.

Indiaisadevelopingcountrycurrentlyundergoingastructuraltransformation.
However,itspathissomewhatdifferentfromthatofabenchmarkdeveloped
country.
Figure2showstheGDPsharesofthethreesectorsoverthepastfourdecades
forIndia.Theservicessharehasincreaseddramaticallyandcurrentlystandsat
53percent.Incomparison,themanufacturingsharehasremainedstagnant,
growingonlyfrom19percentin1970to23percentin2012.Thesechanging
sharesofGDPsuggestIndiamightnowbegoingthroughthesecondstageofits
structuraltransformation.AsshowninFigure3,however,themanufacturing
laborsharehasincreasedfasterthantheserviceslaborshare,whichis

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unexpected.Thesefindingsimplythatproductivityintheservicessectoris
remarkablyhigherthaninthemanufacturingsectorandhassharplyincreased
overtheyears.

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ThispatternofstructuraltransformationinIndiaispuzzlingfortworeasons.
First,inprinciple,Indiasmanufacturingandservicessectorsbothoperatein
similareconomicandregulatoryenvironments.Second,comparedwithboth
developedanddevelopingcountries,theproductivityofIndiasservicessector
relativetoitsmanufacturingsectorisanoutlier.Itsservicessectorisfourtimes
moreproductivethanitsmanufacturingsector,whereasinmostothercountries
theservicessectorisatmosttwiceasproductive(seeChari,Goel,andRestrepo
Echavarria,2015).
WhyisIndiasstructuraltransformationfollowingsuchanunusualpath?Isthe
causeastagnantmanufacturingsectororanexceptionallyproductiveservices
sector?
Itispossiblethatlaborlaws,lackofcreditavailability,andpoorinfrastructure
moreseverelyimpedemanufacturingfirmsthanservicesfirms.Ithasbeen
arguedthat,becausemanufacturingismoredependentonintermediateinputs,
prolaborlawscombinedwithregulationofinputquotashavereduced
productivitygrowthconsiderablymoreinthemanufacturingsectorthanthe
servicessector(seeGupta,2009).Theselawscombinedwithlackofcredit
availabilityleadtononoptimalfactorcombinationsinmanufacturingfirmsbut
influenceservicesfirmsfarless.
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Ontheotherhand,ithasalsobeenarguedthatthespectaculargrowthinthe
servicessectorcanbeattributedtoinputdemandfromagrowing,albeitnotas
fast,manufacturingsector(seeDehejiaandPanagariya,2010and2014).
Thus,whilesomestudiesattributestagnantmanufacturinginIndiatorigid
laborlawsandinputquotas,othersarguethatrapidservicesgrowthiscaused
byincreasingdemandfrommanufacturing.Westilldonothavea
comprehensiveunderstanding,however,ofwhylaborkeepsmovingintothe
manufacturingsectordespitethealreadylargeandstillwideningproductivity
gapbetweenthemanufacturingandservicessectors.

References
Chari,AnushaGoel,ManishaandRestrepoEchavarria,Paulina.GrowingServices,Stagnant
Manufacturing:SectoralResourceMisallocationinIndia.Unpublishedmanuscript,2015.
Dehejia,RajeevH.andPanagariya,Arvind.ServicesGrowthinIndia:ALookInsidetheBlack
Box.WorkingPaperNo.20104,SchoolofInternationalandPublicAffairs,ColumbiaUniversity,
2010http://indianeconomy.columbia.edu/sites/default/files/working_papers/wp_20104.pdf
(http://indianeconomy.columbia.edu/sites/default/files/working_papers/wp_20104.pdf).
Dehejia,RajeevH.andPanagariya,Arvind.TheLinkBetweenManufacturingGrowthand
AcceleratedServicesGrowthinIndia.NBERWorkingPaperNo.19923,NationalBureauof
EconomicResearch,2014http://www.nber.org/papers/w19923.pdf
(http://www.nber.org/papers/w19923.pdf).
Gupta,Abhay.PreReformConditions,IntermediateInputsandDistortions:SolvingtheIndian
GrowthPuzzle.Ph.D.Dissertation,UniversityofBritishColumbia,2009https://mpra.ub.uni
muenchen.de/14481/1/MPRA_paper_14481.pdf(https://mpra.ub.uni
muenchen.de/14481/1/MPRA_paper_14481.pdf).
Kendrick,JohnW.ProductivityTrendsintheUnitedStates.NewYork:PrincetonUniversity
Press,1961.

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