Model Answer
0 min readIntroduction
Structural transformation is a fundamental process in economic development, characterized by a reallocation of economic activity from the primary (agriculture) to the secondary (manufacturing) and tertiary (services) sectors. This shift typically accompanies increases in per capita income and improvements in living standards. In India, while the services sector has witnessed significant growth, the manufacturing sector’s contribution to national income has remained relatively stagnant, creating an unusual pattern of structural change. This has led to debates about the nature of India’s growth and its sustainability, particularly in the context of achieving inclusive and employment-generating economic expansion. The recent focus on ‘Make in India’ and Production Linked Incentive (PLI) schemes aim to address this imbalance.
Historical Trends in Structural Transformation in India
Historically, India’s economic structure was overwhelmingly agrarian. Prior to independence in 1947, over 70% of the workforce was employed in agriculture, contributing a similar proportion to the national income. The post-independence period saw a gradual shift, driven by policies like the Green Revolution (mid-1960s) which boosted agricultural productivity and released labor for other sectors. However, the pace of transformation was slower compared to other Asian economies like South Korea or China.
- 1950-1980: Slow transformation, focus on import substitution industrialization. Agriculture remained dominant.
- 1980-1991: Moderate acceleration due to liberalization measures, but manufacturing growth remained limited.
- 1991-2000s: Rapid growth of the services sector, particularly IT and business process outsourcing (BPO). Manufacturing growth remained subdued – a phenomenon termed ‘premature deindustrialization’.
- 2000s-Present: Continued dominance of the services sector. Recent initiatives like ‘Make in India’ and PLI schemes aim to boost manufacturing.
Issues Hindering Structural Transformation
Several factors have impeded a more balanced structural transformation in India:
Supply-Side Constraints
- Infrastructure Deficits: Inadequate power supply, transportation networks (roads, railways, ports), and logistics infrastructure increase production costs and hinder competitiveness.
- Labor Laws: Rigid labor laws, particularly the Industrial Disputes Act, 1947, make it difficult for firms to scale up or down production, discouraging investment in manufacturing.
- Land Acquisition: Complex and time-consuming land acquisition processes create hurdles for establishing manufacturing facilities.
- Access to Finance: Small and medium enterprises (SMEs), which are crucial for manufacturing growth, often face difficulties in accessing affordable credit.
Demand-Side Constraints
- Low Domestic Demand: Limited purchasing power among a large section of the population restricts domestic demand for manufactured goods.
- Global Competitiveness: Indian manufacturing often struggles to compete with lower-cost producers in countries like China and Vietnam.
Sectoral Imbalances
The disproportionate growth of the services sector, while contributing to national income, has not generated sufficient employment opportunities for the large pool of unskilled and semi-skilled labor released from agriculture. This has led to a phenomenon of ‘jobless growth’.
Implications of Structural Transformation (or Lack Thereof)
The unique pattern of structural transformation in India has several implications:
- Income Distribution: The services sector tends to be more skill-intensive, leading to widening income inequality. Those with higher education and skills benefit disproportionately from the growth of this sector.
- Employment: The lack of robust manufacturing growth limits the creation of employment opportunities for the large number of workers migrating from agriculture.
- Economic Growth: While the services sector has driven growth, its sustainability is questionable without a strong manufacturing base. Manufacturing has higher multiplier effects and can contribute to export diversification.
- Balance of Payments: Reliance on services exports makes India vulnerable to global economic shocks and changes in demand for IT and BPO services. A strong manufacturing sector can boost exports and improve the balance of payments.
| Sector | Contribution to GDP (2022-23) | Employment Share (2021-22) |
|---|---|---|
| Agriculture | 18.3% | 45.8% |
| Industry | 24.3% | 24.7% |
| Services | 57.4% | 29.5% |
(Source: Economic Survey 2022-23, PIB)
Conclusion
India’s structural transformation has been atypical, characterized by a rapid expansion of the services sector alongside a relatively stagnant manufacturing sector. Addressing the supply-side and demand-side constraints hindering manufacturing growth is crucial for achieving inclusive and sustainable economic development. Policies aimed at improving infrastructure, reforming labor laws, facilitating land acquisition, and promoting skill development are essential. A balanced approach that leverages the strengths of the services sector while simultaneously fostering a robust manufacturing base is vital for ensuring long-term economic prosperity and equitable income distribution. The success of initiatives like PLI schemes will be key in reshaping India’s economic structure.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.