K L Krishna, Abdul Azeez Erumban, Deb Kusum das, Suresh Aggarwal and Pilu Chandra Das
CDE Working Paper No. 273
This paper is an attempt to document the evolution of India’s aggregate productivity, decomposed into the contributions of detailed industrial sectors and structural change during 1980-2011. Using the India KLEMS (K = capital, L = labor, E = energy, M = materials, and S = services) database version 2015, which provides comprehensive and consistent industry-level data on Indian economy, we decompose both labor productivity and total factor productivity growth (TFPG) into industry productivity contributions and resource reallocation effects. In general, the impact of static structural change on labor productivity has been positive, as workers moved to sectors of relatively higher labor productivity level. However, no positive dynamic reallocation effects—worker movement to fast growing sectors— have been observed. The industrial pattern of TFPG is not broad based, as several industries have contributed negatively to aggregate productivity growth. While the manufacturing sector did not see significant productivity gains in most part of the 1990s, it did see some revival in the recent years during which the relative importance of services as a major contributor to aggregate TFPG has declined. The structural transformation in India features the absorption of workers moving out of agriculture in the construction sector—a sector that has witnessed substantial deceleration in productivity growth—while employment creation in fast growing services has been slow and in the manufacturing sector rather stagnant. This makes India a unique place in the pattern of structural change, as compared to several of today’s advanced economies. The obvious question is whether India can sustain faster growth in the longer run if it does not focus on developing a solid manufacturing sector.