Growth and Structural

UNIT 3 GROWTH AND STRUCTURAL Change

CHANGE
Structure

3.0 Objectives
3.1 Introduction
3.2 Development and Structural Change
3.2.1 A.G.B. Fisher and Colin Clark
3.2.2 Simon Kuznets
3.2.3 Experience of Developed Countries
3.3 Growth and Structural Change in India
3.4 Changes in Savings and Investment Structure
3.5 Nature of Outcomes of Growth and Development
3.5.1 Poverty in India
3.5.2 Income Distribution in India
3.5.3 Regional Disparities in India
3.6 Let Us Sum Up
3.7 Key Words
3.8 Selected Books for Reading
3.9 Answers/Hints to CYP Exercises

3.0 OBJECTIVES
After reading this unit, you will be able to:

l explain the patterns of structural change that accompany growth;

l examine the theory and empirical experience of developed countries;

l analyse the experience of India’s economic development in terms of

the structural change; and

l describe the sources of growth and nature of outcomes.

3.1 INTRODUCTION
Economic development may be seen as a process of transforming a
poor country into a more developed country. It is often measured in
terms of growth in per capita GDP. To understand this process of
transformation one needs to get at the forces which need to be stimulated
to achieve the GDP growth. One would then be able to see development
as a process of transforming a low savings and low investment economy 53
Approaches to development into a high savings and high investment economy. Structurally, one
could see it as a process of transforming a predominantly primary goods
producing country into a predominantly industrialised country. In the
present unit, we shall examine the theoretical and empirical evidence
that explains the process of economic development by way of a certain
pattern of structural change. Within this framework we shall examine
the nature of structural transformation that has taken place in India. In
particular, we shall examine the changes in the savings and investment
pattern in India. Finally, we shall relate the outcomes of growth to the
major persistent economic challenges like poverty reduction, income
distribution, and regional disparities.

3.2 DEVELOPMENT AND STRUCTURAL

CHANGE
Development economics may largely be characterised as dealing with
issues of structure and growth in less developed countries. In economics,
there are two variants of structure. One is concerned with the functioning
institutional structure like the market and state and their role in the
allocation of resources. The second variant of structure refers to the
interrelationship between the different sectors of economic activity.
This variant views economic development as a long-run process of
structural transformation that accompanies growth. The central features
of this approach are economy-wide phenomena such as industrialisation,
urbanisation, and agricultural transformation. We are concerned with
the latter type of structural analysis that deals with growth and its
resulting structural transformation. For the sake of simplicity, we may
consider an economic structure consisting of three sectors viz. primary
sector (consisting mainly of agriculture), secondary sector (consisting
mainly industries), and tertiary sector (consisting mainly of services).
We shall deal with the patterns of structural transformation during the
transition from a low income, agrarian rural economy to a non-agrarian
and industrial urban economy with a substantially higher per capita income.

3.2.1 A.G.B. Fisher and Colin Clark

The earliest contribution to the theory of economic development and its
structural transformation is attributed to William Petty (1623-1689)
and Friederich List (1789-1846). However, modern analysis of sectoral
transformation originated with A.G.B. Fisher (1935, 1939) and Colin
Clark (1940) who dealt with the sectoral shifts in terms of their
composition of labour force. Using the tri-chotomised sectoral
classification of an economy into primary, secondary and tertiary sectors,
Fisher and Clark explain the reallocation of workforce during the period
of modern economic growth. According to them, as economies
developed there will be shift in the share of workforce initially from
primary (agriculture) to secondary sector and later to the tertiary sector.
The Fisher-Clark explanation can be presented in a graphical form. Figure
54
3.1 shows the nature of shifts in the share of workforce as an economy Growth and Structural
Change
moves from low income per capita to high income per capita. As we
move along the path of development represented by per capita income
on the X axis, agriculture experiences gradual decline in the share of
workforce, whereas industry experiences an increase. This increase in
the share of workforce in industry is much faster as compared to the
increase in services. However, after a point of peak in per capita income,
the relative shares of all sectors stabilise with agriculture accounting
for the lowest share. The main reasons offered for the shift in labour
force to industry are: first, following Engel’s Law, as the incomes rise
the demand for industrial products increase more than proportionally
whereas the demand for food increase less than proportionally. In other
words, the elasticity of demand for industrial products is higher, whereas,
for food it is less. Second, the rate of growth of productivity in industry
is faster which attracts more investment and employment.
Figure 3.1: Relationship Between Sectoral Workforce Shares and
Economic Development (Per Capita Income)

Agriculture

Industry
Services

100

80
Share of
60
Employment %
40

20

0 2 4 6 8 10 12 14 16

Per Capita Income ($000)

3.2.2 Simon Kuznets
Based on the empirical evidence of long-run transformation of a large
number of countries, Simon Kuznets synthesised the broad patterns of
economic growth. Extending the analysis of shifts in workforce from
primary to secondary to tertiary sector, Kuznets also relates the
employment shifts in the shares of contribution to national income. The
resulting relationship between growth and structural transformation is
captured well by distinguishing the three stages of transformation as
follows:

Stage 1: Primary Production: The first stage of the transformation is

identified by the predominance of primary activities – especially
agriculture – which provides the main source of input for the output of
other two sectors viz. the secondary and the service sectors. This initial
stage of transformation is typically characterised by slow growth in 55
Approaches to development agriculture, low demand for manufacturing goods and slower overall
growth rates.

Stage 2: Industrialisation: The second stage of transformation is

characterised by the shift of the centre of gravity of the economy away
from primary production towards manufacturing. The main indicator of
this shift is the relative importance of the contribution of manufacturing
to growth.

Stage 3: The Developed Economy: The transition from stage 2 to

stage 3 takes place on several fronts. Income elasticities for
manufacturing decline. Demand for services increase. Factor productivity
growth spreads to all sectors without remaining confined to
manufacturing. Services emerge as the largest contributor to both
employment and national income. Agriculture turns out to be lowest in
terms of labour share but labour productivity in agriculture increases to
very high level. The wage gap between agriculture and other sectors
starts closing.

3.2.3 Experience of Developed Countries

The ideal pattern of structural change that has been witnessed in most of
the developed countries is as seen in Table 3.1. The highest percentage
of workers engaged in agriculture is 5 percent. In industry it is around
25-30 percent. Services account for the bulk of the employment share
i.e. in excess of 65-70 percent. Sectoral contribution to GDP is also
more or less of the same order i.e. less than 5 percent from agriculture,
between 25-30 percent from industry and the bulk, close to 70 percent
or more from the service sector. But, the experiences of countries like
India, which are latecomers to development, have certain distortions
particularly in the shift of labour shares.
Table 3.1: Output and Employment Shares in Selected Developed
Economies (2002)

Country Share in Output (%) Share in Employment (%)

Agriculture Industry Services Agriculture Industry Services
United 1 26 73 1 25 74
Kingdom
United 2 23 75 2 24 74
States
France 2 22 76 3 25 72
Japan 1 31 68 5 31 64
Germany 1 30 69 3 33 64
Italy 3 29 69 5 32 63
Australia 4 26 69 5 21 74

56 Source: World Bank (2004) World Development Indicators

Check Your Progress – 1 Growth and Structural
Change
1. What is the sectoral composition of an economy? Who were the
pioneers in using the sectoral composition for explaining the structural
transformation of economies?

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2. What is the Fisher-Clark hypothesis of workforce shifts with growth?

Why does labour force shift to industry?

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3. What is the stylized explanation of structural change proposed by

Kuznets?

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3.3 GROWTH AND STRUCTURAL CHANGE

IN INDIA
Since the beginning of the era of planning, for almost three decades the
Indian economy experienced an average real growth rate of about 3.5
per cent per annum. Since the 1980s, the Indian economy broke away
from this slow growth path, and since then has been on a relatively high
growth path. Associated with this growth in GDP, and per capita income,
there has been considerable structural transformation especially in terms
of sectoral composition of GDP. Table 3.2 shows the structural change
in GDP over the period 1950-51 to 2004-05. As expected, the share of
agriculture (primary sector) has come down substantially from 57.7% in
1950-51 to 20.90% in 2004-05. The share of secondary sector (industry)
was 25.54% in 2004-05. In many comparable economies the secondary
sector’s share ranges from 35 to 45 percent. In economic literature,
expansion of manufacturing sector is looked upon to play a technically
dynamic role. But in India, the expansion of tertiary sector (services)
is much faster than that in the manufacturing sector.
57
Approaches to development Table 3.2: Sectoral Share of Gross Domestic Product at Factor Cost in
India 1950-51 to 2004-05
(1993-94 prices)
Year Primary Secondary Tertiary
1950-51 57.7 14.8 27.5
1960-61 53.3 17.9 28.6
1970-71 46.3 21.6 32.1
1980-81 37.2 23.7 36.6
1990-91 32.2 27.2 40.6
2000-01 24.68 25.01 50.31
2004-05 20.90 25.54 53.56

Source: CSO, National Income Statistics, Various Issues.

Questions are raised whether growth, led by services, can be sustained
with a lean manufacturing sector? However, in the context of the
technological dynamism infused by the information and communication
technology (ICT) which also spreads to the manufacturing sector, it is
suggested that the traditional role of manufacturing sector as a vehicle
of infusing dynamism is now assumed by the so-called services sector
which includes ICT.

But, the cause for concern is the lack of proportionate shift in the share
of employment along with the shifts in the share of GDP. For instance,
Table 3.1 showed that the sectoral shares of workforce and the shares
of GDP are almost in the same proportion, indicating uniformity in the
spread of high productivity levels across the sectors to the entire
economy. This also suggests less of income disparities across the sectors.
In contrast, Table 3.3 for India shows that while there is a drastic decline
in the share of agricultural sector in GDP, its share in workforce is still
very high (57 percent in 2004-05). This indicates a low productivity and
low income agriculture sector. In contrast, there is substantial increase
in the share of ‘services’ sector in the GDP with relatively very little
increase in the share of employment. The high productivity and high
income levels of service sector aggravates inter-sectoral income
inequalities. Thus, the structural transformation in the case of Indian
economy appears to be following its own path, unlike the developed
economies, creating structural distortions.
Table 3.3: Relative Sectoral Shares of GDP and Employment
(Percentage Share)
Year Primary* Secondary Tertiary
GDP Employment GDP Employment GDP Employment
1972-73 44.8 74.0 21.0 11.2 34.2 14.6
1993-94 33.5 63.9 23.7 14.9 42.8 21.2
2001-02 26.3 60.8 24.4 17.1 49.3 22.1
*includes mining and quarrying
58 Source: Datt and Sundaram, 2008.
Check Your Progress – 2 Growth and Structural
Change
1. What is the nature of change in the share of agriculture in national
output and employment between 1950-51 and 2004-05?

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2. What is the trend in the share of the secondary sector in employment

and output in India?

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3. Is there any cause for concern in the nature of structural change in

the Indian economy?

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3.4 CHANGES IN SAVINGS AND

INVESTMENT STRUCTURE
Capital accumulation or capital formation, or simply investment, has
been the core of classical, Marxian and modern development theory. In
fact, the process of economic development is seen as a process of
capital accumulation. Much of the ‘development theory’ has been
focused on the explanation of why poor countries do not have adequate
savings, and how countries have to move from low savings to high savings
path. As W. Arthur Lewis (1957) wrote, ‘the central problem in the
theory of economic development is to understand the process by which
a community which was previously saving and investing 4 or 5 percent
of its national income or less, converts itself into an economy where
voluntary saving is running at about 12 to 15 percent of national income
or more’. Thus, according to development theory in general, ‘savings is
the engine of growth’. The famous proposition of Ragnan Nurkse (1953)
on ‘vicious circle of poverty’ also explains poverty as a result of low
savings. Low income leads to low savings and investment which, in turn,
results in small size of the market, low investment levels, low productivity
returns, and, finally ending up in low incomes. Nurkse’s basic development
question, therefore, is how to break the low savings–low investment
vicious circle?

Doubts were expressed on the rising savings ratio, as a proportion of

national income, serving as an engine of growth. It was argued that with 59
Approaches to development increasing savings and increasing physical investment per head, there
would be diminishing returns on investment and hence savings could not
act as the ‘engine of growth’. However, this argument was countered by
the ‘endogenous growth theory’ which argued that savings enabled
accumulation of not only physical capital but also knowledge which
staved-off diminishing returns. The policies that changed savings could
change the rate of growth. The ‘endogenous growth theory’ thus gave a
firm foundation to the proposition that ‘savings is the engine of growth’
and that growth rates can be changed by policies that provide the incentive
to save. The experience of East Asian countries and that of India in
recent years provide ample evidence of the need for high levels of
savings and investment to achieve higher rates of growth.

Savings and Investment (Capital Formation) in India

The Indian economy moved from a position of very low levels of savings
and investment in 1950s and 1960s to relatively higher levels of savings
and capital accumulation in recent years. Estimates of savings in India
are available for three sectors viz. the household sector, the private
corporate sector and the public sector. The household sector includes,
besides individuals, all non-government and non-corporate enterprises
like sole proprietorships, partnerships and institutions. Table 3.4 provides
the source-wise savings in the Indian economy for the period 1950-51
to 2004-05. Examination of savings data presented in Table 3.4 shows that
until late 1960s, the rate of growth of savings was low due to higher share
of low productive (and consequently low saving) agriculture in the GDP

Table 3.4: Source-wise Gross Domestic Savings and Gross Capital

Formation in India (1950-51 – 2006-07)
(As percentage of GDP at Market Prices)
Year Household Private Public Total Gross
Sector Corporate Sector Savings Capital
Savings Sector Savings Formation
Savings
(1) (2) (3) (4) (5) (6)
1950-51 6.2 0.9 1.8 8.9 8.7
1960-61 7.3 1.6 2.6 11.6 14.4
1970-71 10.1 1.5 2.9 14.6 15.4
1980-81 13.8 1.6 3.4 18.9 20.3
1990-91 19.3 2.7 1.1 23.1 26.3
1995-96 18.2 4.9 2.0 25.1 26.9
2000-01 21.2 3.6 - 1.8 23.6 25.9
2006-07 23.8 7.8 3.2 34.8 35.9
Note: The difference between savings (col. 5) and investment (col. 6) is accounted
for by net-capital inflows from abroad.
Source: 1. CSO, National Accounts Statistics, 2006.
60 2. For 2006-07, Economic Survey 2007-08, 2008.
and also due to lack of development of institutions for the mobilisation Growth and Structural
Change
of savings, particularly in rural areas. There was considerable increase
in the savings during 1968-69 to 1975-76 due to bank nationalisation,
rapid expansion of bank branches and improved performance of the
agricultural sector. Beginning with late 1970s, savings experienced rapid
surge contributed mainly by sharp increases in foreign remittances leading
to increase in household savings. Corporate savings too started increasing
during this period. During the 1990s, savings remained stable at a
relatively high level of about 24 per cent. Beginning with 2000-01,
there was another spell of steep rise in savings, mainly as a result of
considerable increase in the corporate savings, taking the aggregate
country’s saving to an impressively high level of 34.8 percent in 2006-
07. In recent years, the savings and investment levels in India, have
reached high levels comparable to those of South East Asian countries.
High levels of sustained savings and investment are among the main
forces of sustained high levels of growth experienced in recent years in
India.

Changes in Investment Structure

Over the years, there have been changes in structure of investment in

terms of industry of use. Table 3.5 shows the changes in the share of
investment of different productive sectors (the 3-sector classification
of the economy further broken down into the 9-sector 1-digit
classification as per NIC-1987) in India between 1950-51 and 2004-05.
There are several factors contributing towards these shifts in the industry
shares. First, as observed earlier, with economic development there
will be shift in the productive sectors in overall national product and
income generation. For instance, the share of agriculture and primary
sector in general declines in the national product, while the share of
industry and service sector increases. These shifts are also reflected in
the changing structure of investments. Second, with development
process, industries with higher capital intensity like energy and
manufacturing are likely to attract more investment. Third, there are
policy induced priorities which may shift investment away from some
sectors. For instance, neglect of agriculture in policy priorities may
lead to decline in its investment share. Further, like shifts in the share
of investments among productive sectors, there may also be shift in the
relative share of investments in public and private sectors. For instance,
economic reforms and diminished role of state in productive sectors
has brought about decline in the share of public investment, compared
to the share of private investment which increased substantially (vide
Table 3.4).
61
Approaches to development Table 3.5: Structure of Gross Capital Formation by Industry of Use:
1950-51 – 2004-05

(Percentage Distribution)

Sl. No. Productive Sector 1950-51 2004-05

(1) (2) (3) (4)
1 Agriculture, forestry & fishing 19.3 7.8
2 Mining and quarrying 0.9 1.7
3 Manufacturing 19.2 34.8
4 Electricity, gas & water 2.2 8.1
5 Construction 0.6 2.0
A. Commodity Sector (1 to 5) 42.2 54.4
6 Trade, hotels & restaurants 12.4 3.7
7 Transport, storage and communication 12.7 12.6
8 Finance, insurance, real estate & 21.3 13.8
business services
9 Community, social and personal services 11.3 13.5
B. Non-Commodity Sector (6 to 9) 57.8 45.6
Total 100 100

Source: Datt and Sundaram (2008).

Check Your Progress – 3

1. How does Lewis explain the central problem in the theory of economic
development?

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2. Explain savings behaviour in the Indian economy during the last two
decades.

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62
3. Explain the changes in the structure of investments in the Indian Growth and Structural
Change
economy during 1950-51 and 2004-05.

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3.5 NATURE OF OUTCOMES OF GROWTH

AND DEVELOPMENT
There is now a wider recognition that economic growth is not an end in
itself but only a means for improved conditions of living. The critical
concern now is therefore with the results or outcomes of growth.
Whether growth has brought about reduction in poverty? Are we moving
towards eradication of poverty? Whether growth has brought about
reduction in employment? Or, is there increase in employment? If, yes,
what type of employment and with what effect on condition of living?
Is growth leading to reduced inequalities? Are regional disparities
declining? These are the important questions in understanding the nature
and impact of growth. With a view to focusing on the implications of
growth on the different aspects of development, as stated earlier in Unit 1
(section 1.2), the UNDP Human Development Report of 1995, had
advocated that the following five types of growth are not desirable: (i)
Jobless growth, implying a growth profile which does not imply
expansion of employment; (ii) Ruthless Growth, implying growth that
increases inequalities; (iii) Futureless Growth, referring to growth that
destroys environment and ecological balance; (iv) Voiceless Growth,
implying growth that does not expand the level of empowerment of the
deprived sections of the society, such as, women, tribals, scheduled
castes etc.; and finally (v) Rootless growth, implying growth, which
destroys cultural roots and life styles of a society.

We have already discussed earlier (in Unit 1, section 1.5.3) issue of

employment and unemployment, here we shall discuss the issues of
poverty, income distribution and regional disparities in India.

3.5.1 Poverty in India

Beginning with the early 1970s, there have been a number of individual
and official estimates of poverty in India. Most of them are based on
the household consumption expenditure data collected every five years
by the National Sample Survey Organisation (NSSO). The generally
accepted norm of poverty is a minimum level of living often indicated
in terms of certain minimum calorie (energy) consumption. The so-
called ‘income poverty line’ is derived first by determining the minimum
energy or calorie requirements, then convert them into physical quantities
like cereals, pulses, milk etc. and then estimate their monetary equivalents 63
Approaches to development in terms of the prices of commodities prevailing in the market. The
resulting minimum per capita consumption expenditure required is
expressed as the ‘poverty line’. In India, poverty lines are estimated
separately for urban and rural areas as well as for the country as a whole.

In 1989, the Planning Commission constituted an ‘Expert Group’ to

consider the methodological and computational aspects of estimating
the number of poor in India. The Report of the Expert Group (1993)
recommended certain norms for the calculation of poverty level
consumption standards. It suggested a minimum monthly per capita
consumption expenditure of Rs. 49 for rural areas and Rs. 57 for urban
areas. This was anchored on the recommended per capita daily intake
of 2,400 calories for rural areas and 2,100 calories for urban areas. The
Expert Group recommended that these norms may be adopted uniformly
by all states.

The official estimates of poor in India are broadly based on the

recommendation of the Expert Group. There are, however, a number of
deficiencies in the official estimates. First, in a country of vast regional
differences, using a uniform national average price index has distorted
the estimates of poverty level in different states. Second, the official
estimates are based merely on adjusting for the price changes without
any reference to the changed consumption basket, and the changed
expenditure requirements to meet the minimum calorie or energy norms.
Third, the official estimates based sometimes on ‘thin sample’ and
different ‘recall period’ are often not comparable and are therefore
misleading.

There are a number of alternative estimates of poverty in India estimated

by individual scholars. Table 3.6 presents the official estimates of poverty
in India.

Table 3.6: Estimates of Poverty in India

(percentages of poor below poverty line)

Year Rural Urban All

1973-74 56.4 49.0 54.9
1977-78 53.14 45.2 51.3
1983 45.7 40.8 44.5
1987-88 39.1 38.2 38.9
1993-94 37.3 32.4 36.0
2004-05 28.3 25.7 27.5

*1999-00 data is not given since it is based on a different recall method and
not comparable.

Sources: i. Ministry of Finance, GOI, Economic Survey 2000-01 and

64 ii. Planning Commission, Press Release March, 2007.
Independent estimates of poverty based on the same source of data Growth and Structural
Change
(NSSO) differ from the official estimates due to differences in the
methodology adopted (e.g. using different price indices for States, making
adjustments for differences in recall period, etc.). Notwithstanding these
differences, over a period of roughly 20 years between 1973 and 2004,
there has been a sharp decline in poverty. Since 1993-94, there has
been decline in the absolute number of poor both in rural and urban
areas. However, in the reform period, beginning with the 1990s, there
has been slowing down of the rate (speed) of decline in poverty. During
the pre-reform period between 1983 and 1993-94, poverty ratio declined
at the annual rate of 0.85 percentage points, while the corresponding
rate of decline in the reform period of 1993-94 and 2004-05 was 0.70
percentage points. Another dimension of change is the growing gap in
the poverty levels of backward States and relatively fast growing States.

Apart from problems of measurement associated with the poverty

estimates, there is a growing realisation that poverty is a multidimensional
problem and a mere reduction in the headcount ratio may not indicate
a real picture of the problem. Poverty is increasingly concentrated in
poorer states, rural areas and among weaker communities. These
communities not only suffer from low levels of consumption but also
multiple deprivations like lack of access to education, better health,
housing and living facilities. There is, therefore, a growing shift in
poverty studies to deal with multiple dimensions of the problem.

3.5.2 Income Distribution in India

Though India has an extensive and comprehensive statistical system,
there are no official statistics on income distribution. Therefore, much
of the discussion on inter-personal income distribution is carried on the
basis of the household consumption expenditure data collected by the
National Sample Survey Organisation (NSSO) every five years.
Consumption expenditure, as we know, as a share of household income
progressively declines with increase in income levels. Yet, it is also
true that absolute consumption expenditure increases with the level of
income. It is for this reason that we use the distribution of per capita
monthly consumption expenditure as a proxy for income distribution.

The popular measure of income inequality is in terms of Lorenz Curve

or Gini Coefficient. Gini Coefficient ranges from 0 to 1; the larger the
coefficient, the greater the inequality. Thus ‘0’ Gini Coefficient
represents perfect equality, and 1 represents perfect inequality. Therefore,
to measure income inequalities in India, we use the Gini ratios of
distribution of per capita monthly consumption expenditure. Since early
1980s, India has been experiencing high growth rates. In the pre-reform
period between 1983 and 1993-94, there was marginal decline in
inequalities both in rural and urban areas. The Gini ratio of monthly per
capita consumption expenditure (MPCE) in rural areas declined from
65
Approaches to development 0.31 to 0.29. However, the difference between rural and urban MPCE
increased. The ratio of rural MPCE to that of urban declined from 0.66
to 0.61 during this period.

In the post-reform period between 1993-94 and 2004-05, inequalities

in income distribution of both the rural and urban areas have increased.
There was also further increase in income disparities between rural and
urban areas. The Gini ratio of rural MPCE increased marginally from
0.29 to 0.30. For urban areas too it increased marginally from 0.35 to
0.36. The ratio of rural MPCE to urban MPCE further declined from
0.61 to 0.56. Thus, although economic reforms have brought about high
economic growth rates, the income distribution is worsening. Further,
although there has been poverty reduction, it has been on a slower rate.
The poor have improved their consumption marginally, but the rich have
become richer with the result that there is growing income inequality
between the rich and the poor.

3.5.3 Regional Disparities in India

In a federal structure like that of India, it is essential to ensure that
economic development brings about balanced regional development. But
in India, even after more than fifty years of planed economic
development, there has been no tendency towards balanced development.
Over the years, especially during the past two decades, there has been
growing inter-state disparities in India. More developed states like
Punjab and Haryana have a per capita development expenditure of about
two and a half times the level of less developed states like Bihar. In the
post-reform period, most of the investments have been flowing to
relatively better developed states, starving poorer states of fresh
investments. There have been efforts to infuse more investment to
backward states by a system of incentives introduced. The National
Development Council appointed two Working Groups [called Pande
(1968) and Wanchoo (1968) Groups respectively], to identify industrially
backward states and Union Territories and another to recommend fiscal
and financial incentives for starting industries in backward areas. Based
on their recommendation, 246 districts were designated backward and
made eligible for concessional finance and other facilities. Examining
the role of fiscal and financial incentives in stimulating industrialisation
of backward areas, the Wanchoo Working Group recommended: (i)
granting of higher development rebate to industries located in backward
areas, (ii) granting of exemption from corporate income tax for a period
of five years, (iii) exemption from import duty on plant and machinery
imported for location of industries in backward districts, (iv) exemption
from excise duties and sales tax for a period of five years, and, (v)
provision of transport subsidy. The impact of these measures have,
however, not been assessed properly. Most of these fiscal and financial
incentives have also since been withdrawn. The post-reform era is known
for states competing for growing private corporate investments of both
foreign and domestic origin. Most of these investments are cornered by
66
a few developed States in the South and North-West region, leaving the Growth and Structural
Change
Central, East and North-East regions much behind.

The Eleventh Five Year Plan recognises that growth performances across
states have been varied and the performance of poorer states with poorer
infrastructure has been lagging behind. The Eleventh Plan accords highest
priority to improving connectivity to the North Eastern States by
upgrading transport infrastructure. It is also proposed to launch a
Backward Regions Grant Fund to be used for investment in identified
backward districts.

Check Your Progress – 4

1. Discuss the nature of declining poverty in India since 1993-94.

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2. How is the income distribution measured in India? What are its trends
in recent years?

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3. What are the trends in regional disparities in India? What are the
measures to combat the same?

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3.6 LET US SUM UP

We began with the understanding that an economy consists of broadly
three economic sectors, viz. primary, secondary and tertiary. As
economic development takes place there will be changes in the economic
structure. The historical experience of the developed countries shows
that with growth in the national income the economic structure changes
from being predominantly agricultural to industrial. With further
progress, the services account for major share in output and employment.

In the case of India, we have seen that while there has been a structural
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Approaches to development change over the past more than fifty years, it is not exactly on the lines
of the experience of developed countries. First, though the share of
agricultural sector in the national income drastically declined (and
presently it accounts for the lowest share), the share of agriculture in
the total workforce still remains the largest. Second, the share of
industrial sector, both in output and employment, has remained low.
Third, the share of service sector output has increased much faster than
that of the industrial sector, although in employment its share is just
about 22 percent. The question that is raised therefore is: whether
development with such a low share of industrial sector share is desirable
and sustainable in the long run?

The unit has also looked at the main factors behind economic growth in
India and has observed that there has been a relatively faster growth in
savings and investment in recent years. This shows that the macro
economic fundamentals behind the present growth process in India is
strong. But in case of outcomes on the fronts of poverty reduction,
income distribution and regional disparities, the picture is less
satisfactory.

3.7 KEY WORDS

Economic Sectors : Economy is normally divided into three
sectors viz. primary (‘agriculture’),
secondary (‘industry’) and tertiary
(‘services’).

Economic Structure : In terms of growth and development, it refers

to relative position (shares) of primary,
secondary and tertiary sectors in national
output and employment.

In terms of institutional arrangement, it

refers to the role of state and market in the
economy.

Structural Change : Changes in the composition of national

output and employment in sectoral terms.

Gini Coefficient : Statistical measure of inequality. It measures

the gap between perfect equality and the
actual equality. Higher the coefficient
greater is the inequality and vice versa.

Poverty Line : A monetary indicator of normative minimum

per capita consumption requirement, below
which one is categorized as ‘poor’.

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 Growth and Structural
3.8 SELECTED BOOKS FOR READING Change

GOI, Ministry of Finance, Economic Survey 2007-08, 2008.

Mahendra Dev, Inclusive Growth in India: Agriculture, Poverty, and

Human Development, OUP, New Delhi, 2008.

Moshe Syrquin, “Patterns of Structural Change” in Handbook of

Development Economics, Vol. I, Edited by H.B. Chenery and T.N.
Srinivasan, Elsevier Science Publishers, 1988.

Norman Gemmel, Structural Change and Economic Development: Role

of Service Sector, Mac Millan, 1986.

Ruddar Datt and K.P.M. Sundaram, Indian Economy, 57th Edition, 2008,
S.Chand, New Delhi.

3.9 ANSWERS/HINTS TO CYP EXERCISES

Check Your Progress – 1

1. See 3.2.1 and answer.

2. See 3.2.1 and answer.

3. See 3.2.2 and answer.

Check Your Progress – 2

1. See 3.3 and answer.

2. See 3.3 and answer.

3. See 3.3 and answer.

Check Your Progress – 3

1. See 3.4 and answer.

2. See 3.4 and answer.

3. See 3.4 and answer.

Check Your Progress – 4

1. See 3.5.1 and answer.

2. See 3.5.2 and answer.

3. See 3.5.3 and answer.

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