Structural Transformation and Employment Generation in India: Past Performance and the Way Forward

Historical experience suggests that a sustained rise in per capita incomes and improvement in employment conditions is not attainable without a structural transformation that moves surplus labour from agriculture and other informal economic activities to higher productivity activities in the non-farm economy. In this paper, I analyse India’s performance from a cross-country comparative perspective, estimating the growth semi-elasticity of structural change. Using a cross-country panel regression, I estimate the effectiveness of growth in moving workers away from agricultural and informal activities as compared to other developing countries at similar levels of per capita income. I show that the performance in pulling workers out of agriculture is as expected given its level and growth of GDP per capita, but the same is not true for pulling workers out of the informal sector. I also propose the following five indicators that need to be kept track of when evaluating the growth process: the growth elasticity of employment, the growth semi-elasticity of structural change, the growth of labour productivity in the subsistence sector, the share of the organised sector in total employment and the workforce participation rate. Comparing these indicators across periods, states, regions or countries, allows us to understand which sets of policies have worked better than others to effective improvements in employment conditions. And taken together the indicators allow us to set structural change targets as well as to say whether the current pattern of growth is going to be sufficient to meet those targets.