India is a developing country in the midst of a structural transformation. However, its path has been somewhat different from a typical transformation.
In a recent Economic Synopses essay, St. Louis Fed Economist Paulina Restrepo-Echavarria and Manisha Goel, assistant professor of economics at Ponoma College, explained that a structural transformation describes how resources are reallocated among the agriculture, manufacturing and services sectors. In particular, this transformation occurs in two stages:
In the U.S., for example, the first stage began around 1870. The break from the first stage to the second stage occurred around 1970. These changes were accompanied by changes in the shares of gross domestic product (GDP):
Restrepo-Echavarria and Goel noted that trends in GDP shares for India suggest that the country is in the second stage of its structural transformation. Since 1970, the services share has increased dramatically to 53 percent, while the manufacturing share has grown only from 19 percent to 23 percent.
However, the manufacturing labor share has increased faster than the services labor share. (For a chart of this increase, see the essay, “India’s Atypical Structural Transformation.”) Restrepo-Echavarria and Goel wrote: “These findings imply that productivity in the services sector is remarkably higher than in the manufacturing sector and has sharply increased over the years.”
They gave two reasons why this pattern is puzzling:
Restrepo-Echavarria and Goel summed up the potential reasons for the anomalies thusly: “While some studies attribute stagnant manufacturing in India to rigid labor laws and input quotas, others argue that rapid services growth is caused by increasing demand from manufacturing.”
The authors concluded: “We still do not have a comprehensive understanding, however, of why labor keeps moving into the manufacturing sector despite the already large and still widening productivity gap between the manufacturing and services sectors.”