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Growth and Structural Change in the Indian Economy

Written By STPORTAL on Thursday, March 15, 2012 | 3:35 PM

Part I

In this chapter you will study the growth of and structural change in the Indian economy in the last fifty years since 1950-51 for which data on most of the macro aggregates are available on an annual basis. We shall concentrate on the growth of gross domestic product at factor cost valued at 1993-94 prices. We shall consider the growth of per capita national income, also valued at 1993-94 prices, which can be taken as the simplest indicator of the level of living or development.

In an earlier chapter, one of the notions of development was posed in terms of structural change along with growth. What do we mean by structure? Most people mean by it production structure, that is, composition of output produced by the economy. Some would like to find out how and where our labour is absorbed. Other factors such as land and capital are not given equal importance. Some would also like to find out how the production of output is divided between rural and urban areas of the country or between public and private sectors of the economy or between organised and unorganised sectors. We shall discuss all of them. But we can appreciate developments since Independence better once we have a little hint about the scene on the eve of Independence.

Economy on the eve of Independence

We had inherited an economy, which was basically geared to the interest of our colonial masters. The rate of growth of per capita income during the hundred year period before Independence, from whatever scanty information is available, was just 0.5 per cent per annul. It has further been noted that there were long spells when the economy actually stagnated or declined.

In the past, we were known for producing fine cotton fabric, handicrafts and other merchandise. Even during the early British Raj, that is, before the onset of industrial revolution in Britain, our economy was an industrial economy by the standards of those days whereas the European economies had yet to usher in modern civilisation. Yet, by the time we got Independence, our economy was primarily reduced to an agricultural economy and we used to export mainly raw materials and minerals for the British industries and even foodgrains while we might have been hungry ourselves.

In 1950-51, our per capita income was no more than Rs 3,700 at 1993-94 prices (while in 1999-2000, it is a little more than Rs 10,000). The contribution of agriculture sector (including animal husbandry and livestock) to the GDP was around 54 per cent by current prices and 50 per cent by constant prices of 1993- 94. If we include forestry and logging and fishing in this sector, then the contribution turns out to be 57-58 per cent. And, if we add mining and quarrying and call the combined sector as primary sector, the contribution of primary sector is found to be about 60 per cent. Manufacturing contributed only around 10 per cent. Contribution of the service sector was thus around 30 per cent. Most of the people were engaged in agriculture—as cultivators on their own tiny holdings or as wage laborers on others’ fields.
Growth of GDP since 1950-51

Growth of an economy is reckoned with growth in its GDP at constant prices. We have now a complete series of gross domestic product at 1993-94 prices from 1950-51 onwards but we give here the GDP series at five yearly interval (see above table).

However, in order to give you a feel about the general tendency of rise and occasional decline in a few years in comparison to their respective preceding years, we give here a graphical presentation of the whole series. We notice from the graph that there were occasional drops in the GDP which we do not notice in the abridged Table presented here. But, generally it has been rising. Over the period of last fifty years, it has increased more than eight times. But we are and should be more interested to know whether growth rate itself has risen over time.

We can also calculate rates of growth for different plan-periods or different decades or for periods divided by significant events. All such breakups have been used by scholars. We shall calculate growth rate per annum by decades only. We shall use two popular methods of calculation of annual rate of growth for long periods, viz. average annual growth and compound annual growth rate.

Growth of Per Capita Income

Per capita income is the ratio of net national product to the (mid-year) size of population. Net national product is likely to follow the pattern of gross domestic product, as the component of net factor income from abroad is small in comparison to the total. Population has been secularly rising in the last fifty years though, of late, the rate of growth of population has started declining. We can remember that, in the case of population, we have only decennial figures and, therefore, can calculate only a single rate of growth of population. Using this technique, population size for each mid-year is interpolated. Dividing net national product by the size of population, per capita income is calculated. Annual per capita income has risen a little less than three times from a little less than Rs 3,700 in 1950-51 to over Rs10,000 in 2000-01, at constant prices of 1993-94. In none of the years shown here, there is a decline over the year in the previous row. But, one can notice that there is hardly any rise in 1965-66 over 1960-61, that is, after a gap of five years. Generally, there is some rise in normal years. It means that 1965-66 was a particularly bad year. In fact, 1965-66 and 1966-67 were years of severe drought, though they gave us green revolution. However, with a view to giving you an idea about the wider fluctuations in case of per capita income, we give here the graphical presentation.

Part II
Growth and Structural Change in the Indian Economy
As an economy grows, its production structure changes. It moves from agriculture towards manufacturing and structure changes. It moves from agriculture towards manufacturing and services. It is understandable. You might have noticed that relatively well-off families spend proportionately less on food items and more on manufactured items. You may also note in your family that, as income increases, expenditure on items other than food increases more than proportionately. But, you should note that normally absolute amount of expenditure does not, broadly speaking, decline; in fact, increases but less than proportionately. It implies that production structure should shift away from agriculture. Moreover, many agricultural products, which used to directly reach the households, will now reach after some processing and through long channel of distribution. Bread, noodles, sauces and juices are good examples. It means activities of manufacturing and trade will increase. So, let us see how the production structure has changed.

We know that hundreds of thousands of activities are always in operation in any modern economy. Many activities emerge and some of them die down; some of them even re-emerge, may be, in a modified form. But, it is difficult to discuss in terms of each single item. We often aggregate them on the basis of similarity of products or nature of activities.

Our Central Statistical Organisation uses nine broad categories, called sectors. Six of them are further subdivided in two/three/four subcategories. Industry as a sector does not occur in it; industry is accommodated in ‘mining (and quarrying), manufac-turing and electricity’. In total, there are 18 categories, sectors and sub-sectors, in which total economic activity of the country is presented in the National Accounts Statistics.

There are, however, two three-fold classifications in which economists discuss changes in production structure. One is agriculture, manufacturing/ industry, and services and the other is primary, secondary and tertiary. Besides cultivation of crops, agriculture includes livestock and animal husbandry. But forestry and logging and fishing are clubbed with agriculture to make a broad sector of ‘agriculture, forestry and fishing’. If we add the sector of mining and quarrying to this sector, we can call it ‘primary sector’ as these activities are associated with nature.

The manufacturing sector is further subdivided into registered and unregistered manufacturing, depending upon whether manufacturing units are registered under Factories Act 1948. Industry may include manufacturing and mining and quarrying. On the other hand, if we club the sectors of electricity, gas and water supply and construction with manufacturing, we can call it ‘secondary’ sector.

This is just a matter of convention. There may be differences between countries and within a country changes in classification may occur over time. We did not have exactly the same classification always. While new products gain entry with each major revision of national accounts, some swapping of activities is possible. For example, earlier LPG gas was included in the sector of electricity, gas and water supply, now it is part of manufacturing. While we shall highlight some salient features of production structure or composition of output, it would be interesting for you to do your own exercises and develop your own views on contributions of different sectors.

Absolute Contribution of Different Sectors

It is easy to see that agriculture production has been continuously on increase and has increased about fourfold. Since our Table does not include all the years, we do not find any drop in agricultural production. There are many periods when agricultural production actually fell. Whenever we notice a fall in the gross domestic product, a major reason is likely to be a fall in agricultural production as its contribution to GDP had been substantial. We were most severely hit in agriculture in the consecutive years of 1965-66 and 1966-67. These years, however, gave us green revolution. We are now quite comfortable with the overall performance of agriculture. Yet, we had had two-three years of setback in each of the decade. We should remember that agriculture gives us food, milk and meat and gives to industry the raw material needed particularly for consumer goods industries. Compared to agriculture, other sectors included in primary sectors are small; the contribution of primary sector is found to have risen only four times.

Manufacturing which contributed about Rs 12,500 crore in 1950-51, contributed to the tune of Rs. 2,00,000 crore in 1999-2000, almost sixteen-fold increase over the period. Annual construction activity also rose ten times. Construction does not mean only houses but also roads and railway lines, dams, and canals, bridges and flyovers, etc. and also huts. Electricity, gas and water supply were in nascent stage in the wee hours of Independence, contributing less than Rs 500 crore at 1993-94 prices. Its contribution rose 60 times in 50 years. Overall contribution of the secondary sector rose fifteen-fold.

Trade along with hotel and restaurant business rose fourteen-fold over the period while transport along with storage and communication rose eighteen-fold. Financial and business services including insurance and real estate also rose fifteen times while community, social and personal services, including public administration and defense rose only eleven-fold. Thus, in the second half of the twentieth century while the contribution of primary sector to GDP rose to four fold that of secondary and tertiary sectors rose by fifteen fold each.

Relative Contribution of Different Sectors

Relative contribution of a sector depends on its own performance as well as that of other sectors. As a result, despite positive contribution, a sector may lose relative position. Thus, while agriculture contributed 50 per cent to the making of GDP in 1950-51, it contributes less than 25 per cent at the close of the century despite four-fold increase in its output. The contribution of primary sector came down from close to 60 per cent to less than 30 per cent over the period.

The share of manufacturing in GDP has gradually risen from 9 per cent to 17 per cent over the period. The share of electricity, gas and water supply, which was hardly one third of one per cent rose to close to 2.5 per cent. The activity of construction, despite good rise in absolute terms, is considered to be slackening; during the first twenty years, while the share rose from 4 per cent to 6 per cent, during the last thirty years it fell back to 5 per cent. Secondary sector as a whole raised its contribution from about 14 per cent to more than 24 per cent. The secondary sector is closely contesting the primary sector as far as its contribution to the GDP is concerned. Let us look at the tertiary sector. The share of contribution of activities of trade, hotel and restaurant business rose from 8-9 per cent to 14-15 per cent while that of transport, storage and communication rose from 3.3 per cent to 7.3 per cent over half the century. The contribution of financial and business services increased from 6.7 per cent to 12.7 per cent while that of community and personal services increased from 9.4 to 13.4 per cent. It may be noted that, among the sectors within tertiary sector, in 1950-51, the contribution of community and social services dominated the scene but it gradually gave way to trade but in the nineties sector of financial and business services emerged as close contestant. However, it may be pointed out that public administration and defence, which contributed to the tune of 3 per cent in 1950-51, are now contributing more than 6 per cent. Within the broad category of community and social services, the share of public administration and defence has risen from 1/3 to 1/2 over the period

Growth of Different Sectors

we can also derive a table giving us the rate of growth of different sectors. We have computed only compound annual growth rates (Table 3.7). We should take these rates with a pinch of salt as they crucially depend upon initial and final figures. Roughly speaking, agricultural situation during sixties and seventies can be said to be bad as the rates of growth fell below that of population. Foodgrains dominate in our agriculture and we cannot afford to import it. Even if we import some agricultural produce, being a large country, we ought to produce enough foodgrains ourselves. During the nineties, the growth of foodgrains production is somewhat slackening. So long as it does not create bottleneck for raw material for industry and supply of foodgrains does not fall short of domestic demand, we can afford a little lower growth rate in future. The rate of growth of primary sector has always been lower than that of secondary and tertiary sectors, which is a major reason for decline in its share.

Manufacturing sector activity grew at twice the rate of agriculture. The seventies were bad for all sectors. Electricity, gas and water supply accorded a very low rate of growth of 4 per cent per annum during the seventies. So was the case with construction. Secondary sector as a whole did pretty well during the eighties, better than during the nineties.

The nineties belong to the tertiary sector, which grew at the rate of 7.8 per cent per annum. All service sectors are growing faster in the nineties than they did in the eighties wherein performance was better than that in the seventies in terms of growth. There are, one can see, a couple of exceptions to this observation.

The overall movement seems to be away from primary/agricultural complex to secondary and tertiary sectors. The drop in the share of agriculture is shared between secondary and tertiary sectors; and as time passes the share of tertiary sectors is increasing faster than the share of secondary sectors.

Changes by Other Segregations of Production

Three important divisions of activities are often discussed by scholars so far as production structure is concerned. One is the division regarding location of activities, location being divided between rural and urban areas. The second is on the basis of ownership of production establishments, division being made between public and private. The third one is about organised and unorganised sectors.

Division between Rural and Urban Areas

Agriculture is the industry of the country-side and manufacturing is the industry of the town, said Adam Smith, father of Economics. As a habitation diversifies its economic activities, it changes its status from rural to urban at some point meeting certain definitional marks. In India, in last fifty years, the number of towns has increased from 2800 to 3600 and population living in them has increased from a little over 6 crore to 26 crore. The proportion of population living in urban habitation is now well over 25 per cent, which in 1950-51 used to be around 16 per cent. On the other hand, the number of villages is now about six lakh and a village may have more than one hamlet. The number of rural habitations is over 10 lakh. Not only agricultural and pastoral activities are carried out in rural habitations, manufacturing (handicrafts), trade (retail), transportation (bullock carts and tractors) are also part of rural activities and rural folk benefit from them.

We do not have regular annual series of production output of the activities according to rural-urban division. The CSO has made available such a division for the years 1970-71, 1980-81 and 1993-94 but only at current prices and for net domestic product. With the help of these figures, we gather some broad idea about the shift in activities. From the perusal of these statistics, one would notice that in 1970-71 only 62.5 per cent net domestic product was generated in the rural area where more than 80 per cent population resided (and worked) while in the urban area population residing (and working) was less, 20 per cent, the net domestic product generated was 37.5 per cent.

Thus, per capita net domestic product in the urban area was 2.45 times that in the rural area. When we look at the data for 1993-94, we gather that while population proportion in rural area has reduced by about 6.7 per cent points, its contribution to net domestic product has reduced by 8.6 per cent points but just the reverse could be said to be the case with the urban area. But the loss of 6.7 points in 80.2 points is not the same as gain of 6.7 points in 19.8 points. Therefore, net accretions to the two areas on per capita basis show that per capita net domestic product in the urban area is 2.39 times that in the rural area. Though this ratio is not deteriorating over time, it is high enough to make people move to urban areas even if unemployment rate is somewhat higher in urban areas.
Division between Public Sector and Private Sector

Ever since there has been the state, there has been public sector. But the presence of public sector in production, beyond public administration and control, was very little before Independence. It has been increasing over time as we pursued a policy of state intervention in various sectors for variety of reasons. There is not one broad sector of economic activities where public sector is altogether absent. We have firm data on contribution of public sector in different production sectors since1960-61. A cursory look suggests that the importance of public sector had been on increase with the passage of time in practically all sectors. The share of public sector, which was barely 9 per cent even in 1960-61, has increased close to 27 per cent though of late the speed of rise has slackened.

Public administration is purely a public sector activity and in fishing, it has just shown its presence. In agriculture its presence has increased but it predominantly seems to be irrigation as this activity is accounted for within the sector of agriculture. Its contribution in forestry and logging sector is drastically reducing. Most of the mining activity is under public sector and it is now around 80 per cent. Even in the sector of manufacturing its share has gradually increased from around 7 per cent in 1960-61 to around 20 per cent in 1998-99. The share in construction activity has increased from less than 5 per cent in 1960-61 to almost 16 per cent in 1998-99.

It is in trade that public sector has withdrawn since 1980-81 when it participated to an extent of 8.5 per cent. Its role in transport has also plummeted to some extent yet it plays a great role. The railways are completely with the Government of India. In road transport, state corporations play a significant role at least in passenger transport. In financial sector too, the presence of public sector rose significantly; it rose from 6.5 per cent in 1960-61 to 17 per cent thanks due to nationalisation of 14 major banks. A further dose of nationalisation in 1975-76 led to its further rise to 27 per cent by 1980-81. Even 6.5 per cent in 1960-61 should owe a great deal to the nationalisation of Imperial Bank as the State Bank of India.

Division between Organised and Unorganised Sectors

Organised sector includes all public sector establishments and private sector establishments registered under one or the other act, such as Company Act, Factory Act, Societies Act or Cooperative Act, etc. They are supposed to maintain accounts. Net domestic product was found divided between organised sector and unorganised sector in 25:75 ratio in 1960-61. With passage of time, the proportion of organised sector went on increasing, with some fluctuation, and reached around 30 per cent by 1980-81. Since then, its share has been rising and it is expected to be around 40 per cent by the close of the century. Within organized sector, manufacturing accounts for 40 per cent and community and personal services, 30 per cent while trade and finance may account for 25 per cent.

Industrial Structure of Employment

All able-bodied persons should work. Children should not be allowed to work. Old, sick and infirm should not be permitted to work. Even if production is almost mechanised, there is a man behind the machine. People who are employed and people who employ as well as people who are self-employed are all treated as workers. Their numerical strength is known as work force. People who are willing to work at the prevailing wage rate but are not employed, are treated as unemployed. Despite the general feeling that a large number of people are unemployed, the percentage of people who are unemployed is not very large. (However, in the composition of the unemployed, a large number comes from the educated lot). The reason is that poor people cannot afford to be unemployed.

They work on somebody else’s farm, shop or factory or engage themselves in some or the other activity on their own account. We should, however, remember that statistics used by us do not include people engaged in activities carried out in homes and hearths by the members of the family/household. The proportion of people working in total population in our country is around 40 per cent. This proportion is higher in the case of male members and those living in villages. There is a variety of ways in which employment data is presented. One classification is sectoral (or industrial) and the other is occupational. They are made for each of basic four categories, viz., rural male, rural female, urban male and urban female. Employment data is available from the census as well as the NSS. The census data for 2001 is not yet available in as much detail as we need them in this chapter. We opt for the NSS data. However, comparable NSS data is available from 1972-73 only at an interval of five years .
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