Thursday, November 11, 2010
GROWTH AND STRUCTURAL CHANGE IN THE INDIAN ECONOMY
GROWTH AND STRUCTURAL CHANGE IN THE INDIAN ECONOMY
As an economy grows it will undergo some structural changes. The composition of its GDP and structure of employment will change. This has been the experience of all the developed and developing economies. Indian economy also has been experiencing this structural change. Here we shall discuss the growth and structural change in the Indian economy in the fifty years since 1950-51. Particularly, we will examine the structure and trends in GDP and growth in per capita income.
Structural change refers to change in the structure of the economy. What do we mean by the structure of the economy?. There are a few explanations to this question. But the major important explanation is that structure means production structure. Production structure refers to the composition of out put or the source of out put. That is, the contribution to output by the primary, secondary and tertiary sectors of the economy.. similarly the contributions of the public and the private sector, the rural and the urban sector and the organized and the unorganized sector are all important. Employment of an economy’s labour force among the various sectors is Another dimension of the economy’s structure. We shall discuss all these changes.
To understand structural change, comparison of the present with the past is necessary. Therefore to understand the changes in the Indian economy in the fifty years since independence , let us start from the situation on the eve of independence.
Indian economy on the eve of independence
More than two centuries of British rule drained India off a major part of her vast resources. Thee British plundered India as any imperialist power would plunder an colony. India’s famous handicrafts were destroyed. Our economy became a predominantly agrarian economy. The colonization of India expressed itself in two forms. Firstly, India became a source of raw material for British industry. Secondly, India became a market for British finished products.. for long periods under British rule, the economy either stagnated or declined. It has been estimated that the rate of growth of per capita income during the 100 years before independence was mere 0.5 percent per year.
On the eve of planning in 1950-51, our per capita income was Rs.3700(at 1993 -94 prices). Contribution of agricultural sector was 58 percent of the GDP (inclusive of mining nad quarrying contribution of the primary sector touched 60 percent). Contribution of the manufacturing sector was 10 percent and that of the service sector was 30 percent. Regarding employment structure, most of the people were engaged in agriculture either as small farmers or as agricultural labours.
Growth of GDP since independence
Since 1950-51, India’s GDP has been growing. Economic planning initiated in 1950-51 and ambitious programs of industrialization resulted in much quicker growth in GDP compared to pre-independence period. This is evident from the table which gives five yearly GDP at constant prices from 1950-51 to 2000-01.
GDP at constant prices is the sum total of the money value of all goods and services produced in the domestic territory of a country during a year, calculated at base year prices. GDP at constant prices tell us what GDP would be, if prices remained constant. This enable us to find out the real growth in GDP.
Per capita income can be defined as the ratio of the net national product (NNP) to the size of the population.
Per capita income (PCI) = Net National Product / size of population.
Per capita income figures at five year intervals for the period 1950-51 to 2000-01 are shown below.
Per capita income at constant prices from 1950-5- to 2000-01
Fiscal year PCI(Rs.) Fiscal year PCI(Rs.)
Source: National Accounts Statistics CSO
Earlier while discussing GDP , we saw that five yearly figures overlook the occasional annual declines in GDP. This is applicable in the case of PCI also. Therefore, let us look at the graph of PCI for the period 1950-51 to 2000-01 drawn on annual basis. This graph captures the occasional annual declines also. It is clear from the figure below which is on a annual basis.
Per capita income growth rate
We have seen the importance of the growth rate of the GDP. Similarily, rate of growth of PCI also is important. It reflects the rate of improvement in the living standards of the people. The rate of growth of PCI over the five decades from 1950-51 to 2000-01 is shown below.
Annual growth rate of per capita income for different decades (percent per annum)
Period Average annual Compound annual
1950-51 to 1959-60
1960-61 to 1969-70
1970-71 to 1979-80
1980-81 to 1989-90
1990-91 to 1999-00
1950-51 to 1999-00 1.53
Source: National Accounts Statistics CSO
The following conclusions can be drawn from the trends in PCI as shown in the above table.
1. Rate of growth of PCI was very low in the first three decades.
2. growth rate was the lowest during the seventies.
3. Growth rate improved considerably (more than double of the rates during the first three decades) during the eighties and nineties.
4. for the whole five decade period from 1950-51 to 2000-01, average growth rate in PCI was above 2 percent.
Changes in production structure of the Indian economy
As an economy grows, its production structure shifts from agriculture to manufacturing and services. In a backward economy, agricultural products would be directly consumed. In developed economies a major part of agricultural products will be preserved, processed and sold. For example, tomatoes will be processed in factories and converted in to products like sauce, ketchup and soup. These will then be sold through distribution channels. Manufacturing tomato sauce is an industrial activity and selling it through shops is a service activity. Thus, production structure shifts away from agriculture to industry (manufacturing) and services. This is n important structural change of the economy. It is an inevitable consequence of growth and development. Let us examine how the production structure of the Indian economy has changed from time to time.
Economic activity, that takes place in an economy run in to hundreds or thousands. It is difficult to discuss all these separately, item by item. Therefore, we classify these activities into broad categories on the basis of certain similarities. Similarities may be in products or in the nature of activities.
Central statistical Organization (CSO) that calculates national income in India, uses nine broad categories of economic activities called sectors. Six out of these nine sectors are further sub divide. In total, there are 18 categories. Total economic activity of the country is presented in these 18 categories by the CSO. This is shown below.
SECTOFR CLASSIFICATION ADOPTED BY THE CSO
1. Agriculture, forestry and fishing.
b. Forestry and logging
2. Mining and quarrying
4. Electricity gas and water supply
6. Trade, hotels and restaurant
7. Transport, storage and communication
b. Transport by other means
8. Financing, insurance, real estate and construction
a. Banking and insurance
b. Real estate ownership of dwelling and business services
9. Community, social and personal services
a. Public administration, defense and quasi-government bodies
b. Other services
There are two simple classifications of economic activity which are often used to study structural changes. They are:
1. agriculture, manufacturing (industry) and services
2. Primary, secondary and tertiary sectors.
Agriculture including livestock and animal husbandry), forestry, fishing, mining and quarrying together form the primary sector. This is called primary sector as these activities are associated with nature. Manufacturing or industry (including both registered and unregistered manufacturing) along with electricity, gas, water supply and construction constitute the secondary sector. All services come under the tertiary sector. There can be slight changes in the activities listed under the different sectors from country to country.
Let us look at the sectoral composition of GDP to understand the structural changes in the Indian economy. We can look at the sectoral composition in absolute terms, percentage terms and in terms of rate of growth. These numbers need not bother you. You don not have to remember all these numbers. It is only to get you people a broad idea about some trends and major structural changes.
Contribution of different sectors in absolute terms
Below given table shows the absolute contribution of different sectors to GDP for the five decades between 1950-51 to 2000-01.
Sectoral contribution to GDP at constant prices (1993-94) for the period 1950-51 to2000-01(Rs. Crorers)
SECTOR OF ACTIVITY
1950-51 1960-61 1970-71 1980-81 1990-91 1999-00
Forestry and logging
Mining and quarrying
Electricity, gas and water supply
Trade, hotels and restaurant
Transport, storage and communication
Financing, insurance, real estate and business services
Community, social and personal services
GROSS DOMESTIC PRODUCT 70,456
Source: National Income Accounts. CSO.
From the above given table, we can draw the following inferences:
1. The contribution of the primary sector has grown four times during the period from 1950-51 to 1999-00. Agriculture is, by far, the dominant activity in the primary sector.
2. The secondary sector has grown 15 times. Within this sector, electricity, water supply and gas has grown the fastest 60 times. Manufacturing grew 16 times.
3. The contribution of the tertiary sector has grown 14 times, within the sector, the fastest growth was recorded by transport, storage and communications,18 times.
Relative contribution of different sectors
Absolute contribution of each sector to GDP does not tell us anything about the relative share of each sector in GDP. To understand structural changes we have to know the relative share of each sector. Relative contribution of a sector indicates the performance of that sector as well as other sectors. Therefore, it is quite possible that the relative contribution of a sector would decline even when its absolute contribution increases. To understand this we can look in to another table which is given below.
Sectoral contribution to GDP at constant prices (1993-94) for the period 1950-51 to 1999-00 (in percentage)
SECTOR OF ACTIVITY 1950-51 1960-61 1970-71 1980-81 1990-91 1999-00
Agriculture 50.16 47.26 40.96 35.76 28.96 23.16
Forestry and logging 6.73 4.71 4.42 2.97 1.70 1.09
Fishing 0.89 1.03 1.08 0.99 1.00 0.95
Mining and quarrying 1.48 1.74 1.78 2.11 2.86 2.30
PRIMARY SECTOR 59.26 54.75 48.23 41.82 34.52 27.50
Manufacturing 8.89 10.90 12.62 13.82 16.64 17.08
Electricity, gas and water supply 0.33 0.59 1.18 1.69 2.34 2.45
Construction 4.07 5.12 6.11 6.08 5.52 5.10
SECONDARY SECTOR 13.29 16.61 19.91 21.59 24.49 24.63
Trade, Hotels and Restaurants 8.64 9.83 10.91 12.19 12.54 14.61
Transport, storage and communication 3.31 3.91 4.64 6.22 6.19 7.33
Financing, insurance, real estate and business services 6.68 6.10 5.94 6.52 9.67 12.72
Community, social and personal services 9.41 9.17 10.69 11.65 12.18 13.20
TERTIARY SECTOR 28.03 29.01 32.18 36.59 40.58 47.87
GROSSDOMESTIC PRODUCT 100.00 100.00 100.00 100.00 100.00 100.00
Source: National Income Accounts CSO
From the table, e can draw the following conclusions.
1. The share of the secondary sector increased from the 13 percent to 25. The share of manufacturing almost doubled from 9 percent to 17 percent. The share of electricity, gas and water supply rose sharply from 0.33 percent to 2.45 percent.
2. By 1990-91, the tertiary sector pushed backward the primary sector in relative contribution and emerged as the largest sector of the economy. Its share rose from the 28 percent in 1950-51 to 48 percent in 1999-00. with in the sector, trade, hotels and restaurant represent the largest sector.
3. Even though the agricultural output grew four times during the period 1950-51 to 1999-00, its relative share in GDP shrank from 50 percent to 23 percent. Consequently the share of the primary sector contracted from 59 percent to 28 percent. (rounded figure)
Rate of growth of different sectors
Structural changes happen due to faster growth of certain sectors in relation to others. We have seen that the the share of the primary sector in GDP declined and that of the tertiary sector grew. This is because, the rate of growth of the tertiary sector was higher than of the primary sector. Now we will get an idea about the rate of growth of different sectors and sub sectors during different decades from below drawn table.
Rate of growth of different sectors over the decades (in percent / per annum)
SECTOR OF ACTIVITY 1950-51 to 1960-61 1960-61 to 1970-71 1970-71 to 1980-81 1980-81 to 1990-91 1990-91 to 1999-00 1950-51 to 1999-00
Agriculture 3.29 2.22 1.68 3.41 3.22 2.70
Forestry and logging 0.26 3.03 -0.94 -0.13 0.73 0.57
Fishing 5.45 4.17 2.14 5.80 5.19 4.43
Mining and quarrying 5.59 3.88 4.89 8.86 3.26 5.21
PRIMARY SECTOR 3.09 2.39 1.62 3.61 3.17 2.71
Manufacturing 6.05 5.23 4.02 7.60 6.12 5.67
Electricity, gas and water supply 10.29 11.14 6.82 9.11 6.36 8.56
Construction 6.32 5.54 3.03 4.59 4.89 4.77
SECONDARY SECTOR 6.25 5.59 3.91 6.96 5.88 5.59
Trade, hotels and restaurants 5.25 4.78 4.22 5.92 7.62 5.40
Transport, storage and communication 5.67 5.49 6.14 5.56 7.82 5.97
Financing, insurance, real estate and business services 2.97 3.42 4.05 9.86 9.09 5.65
Community, social and personal services 3.65 5.29 3.97 6.08 6.77 5.01
TERTIARY SECTOR 4.27 4.77 4.41 6.72 7.77 5.42
GROSS DOMESTIC PRODUCT 3.91 3.69 3.07 5.61 5.81 4.30
Population 1.91 2.23 2.30 2.14 1.87 2.05
Source: National Income Account CSO
By analyzing the above table, we can draw the following trends.
1. The rate of growth of the primary sector has always been lower than that of the secondary and tertiary sectors. This is the reason why the share of the former has declined.
2. Manufacturing grew at twice the rate of agriculture.
3. the decade of seventies was one of poor growth for all sectors. The secondary sector did well during the eighties and the tertiary sector in the nineties.
Changes in the sectoral composition of the GDP (both absolute and relative) and their rate of growth reveals a clear trend. This is the shift away from agriculture towards industry and services.
Changes by other segregations of production
So far, our discussion was about economic activity based on a three fold classification, viz., primary, secondary and tertiary sectors. This is the most popular and widely used classification. But there are other types of division of economic activity. They are,
1. division based on the location of the activity, ie. between urban and rural areas.
2. Division based on the ownership, ie, between public and private sectors.
3. Division based on the nature of the organization, ie, between organized and unorganized sectors.
Division between rural and urban areas in India
It is an established economic fact that as an economy grows, urbanization sets in. there will be an increasing shift of people and economic activity towards urban areas. The total number of towns in India has increased from 2800 to 3600 in the last 50 years. The number of villages is about six lakhs. According to the CSO, in 1970-71 around 80 percent of people lived in rural areas and 62.5 percent of net domestic product came from there. Urban areas accounted for 20 percent of population but 37.5 percent of net domestic product. By 1993-94, rural areas accounted for 77.3 percent of population and 53.9 percent of net domestic product. Urban areas accounted for 22.7 percent of population and 44.1 percent of net domestic product. The trend of urbanization in Indian economy is very very clearly revealed.
Division between public sector and private sector in Indian economy
In every country there are and public and private sectors. But the role and importance of the two sectors vary depending on the economic system. In India, till recently, the public sector has been growing rapidly. The 1948 and 1956 Industrial Policy Resolutions gave importance to the public sector and reserved many industries exclusively for the public sector. The share of the public sector increased from 9 percent in 1960-61 to around 27 percent in mid nineties. But now as result of privatization, the role, importance of the public sector is declining.
There are many areas where public sector is still very dominant. There are railways, mining, irrigation, steel, banking, etc. Of these, in steel, banking and insurance the private sector is expanding in a big way. But railway is still a monopoly. In road transport and electricity, there is sizeable public sector presence in at state levels. 80 percent of the mining is in he public sector. In manufacturing, the share of the public sector has increased from 7 percent in 1960-61 to 25 percent in 1998-99.
The policies of liberalization and privatization have arrested the growth of the public sector in India. Now, private sector is growing much faster than the public sector. This trend is likely to continue.
Division between organized and unorganized sectors
All units, weather in the public or private sectors, registered under any act such as companies Act, Factories Act, Societies Act, Co-operative Act, etc., come under the organized sector. Organized sector have to keep accounts and comply with norms laid down by the Act under which they are registered. Unorganized sectors include tiny units like small shops, household enterprises, etc. they are not covered under any Act. As an economy grows, share of the organized sector increases and that of the unorganized sector declines. The fact that this is happening in India is evident from the below table.
Share of the organized and unorganized sectors in India’s NDP
Period Percentage share in NDP
1960-61 25 75
1980-81 30 70
1999-00 40 60
Industrial structure of employment
Structural changes in the economy reflect changes in the employment structure also. Structural changes in employment are reflected in the industrial structure of employment. Industrial structure of employment refers to the distribution of employment among various sectors. As an economy grows, the number of people employed in the primary sector declines and the share of and the share of employment in the secondary and tertiary sector increases. In developed countries majority of the workforce is employed in the service sectors.
India’s population now is above 100 crores. Of this, 40 crores are employed. (this includes employer, employees and self employed). This 40 crore is India’s work force. To under India’s occupational structure, let us look at the employment data. Employment data is normally presented on the basis of industrial (sector) classification. This data is available from the National Sample Survey (NSS).
Industrial classification of workers from 1972-73 to 1999-00
Industrial classification of workers from 1972-73 to 1999-00 (in percentage)
SECTOR OF ACTIVITY 1972-73 1977-78 1983 1987-88 1993-94 1999-00
Agriculture and allied activities 74.0 72.0 68.4 64.1 63.9 59.8
Mining and quarrying 0.4 0.5 0.6 0.7 0.7 0.6
PRIMARY SECTOR 74.4 72.5 69.0 64.8 64.6 60.4
Manufacturing 8.8 10.2 10.7 11.3 10.6 12.1
Electricity, gas and water supply 0.2 0.2 0.3 0.4 0.4 0.3
Construction 1.8 1.7 2.3 3.8 3.2 4.4
SECONDARY SECTOR 10.8 12.1 13.3 15.5 14.2 16.8
Trade and commerce 5.0 5.8 6.9 7.3 7.6 9.4
Transport, storage and communication 1.8 1.9 2.5 2.7 2.8 3.7
Other services 8.0 7.7 9.2 9.7 10.5 9.6
TERTIARY SECTIOR 14.8 15.4 18.6 19.7 20.9 22.7
Total employment (crores) 23.6 27.1 30.3 32.2 37.2 39.7
Source: Manpower Profile in India & Report of Task Force on Employment.
The changes in employment structure are clear from the above table. The share of primary sector in the employment has declined from 74.4 to 60.4 during the period 1972-73 to 1999-00. the share of the secondary and tertiary sectors has increased from 10.8 and 14.8 percents to 16.8 and 22.7 percents respectively. It is important to note that, total employment in the country also went up during this period from 23.6 crores to 39.7 crores.
In this discussion, we have seen that, the Indian economy during the last 50 years have undergone important structural changes. The growth rate of GDP improved from around 0.5 percent in the fifty years before independence to 4.11 percent during 1950-51 to 1999-00. Per capita income grew by more than 2 percent during this period. Even though agricultural production increased more than 4 times, the share of agriculture in total out put and total employment declined. The share of agriculture in GDP declined from 50 percent to 24 percent and employment declined from 74 percent to 60 percent. The share of the secondary sector and tertiary sector in GDP and employment increased. It is important to note that presently the tertiary sector accounts for almost half of the GDP.
Apart from the structural changes reflected in sectoral composition of out put and employment, structural change occurred in rural, urban, public private nad organized, unorganized segments. The share of the urban, public and organized segments grew during the period 1950-51 to 1999-00. these structural changes have greatly transformed the Indian economy.