By Santosh Mehrotra

Since Economics Nobel winner Simon Kuznets’ research, structural transformation of all economies is characterised by two simultaneous phenomena—the first being a structural shift in terms of contribution of the three main sectors (agriculture, industry, and services) to the gross domestic product in favour of non-farm sectors. The second involves total employment in the economy, with a shift away from agriculture towards the other two main sectors—first towards industry, followed by services. The pace of structural change in India’s economy has been slow since 1950 (as compared to China, for example). Between 1950-51 and 1980-81 (during India’s so-called Hindu rate of growth of 3.5%), the contribution of agriculture to India’s GDP fell slowly (from 54% to 38%). Meanwhile, the rise of industry was reflected in its share rising from 14% in 1950-51 to 23% in 1980-81.

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Manufacturing’s contribution to GDP began to grow with the import-substituting industrialisation strategy adopted during the first three Five Year Plans (1950-51 to 1965-66)—it rose from 14.5% in 1960 to 17.5% in 1980. Services’ share in the GDP was 30% in 1950-51, and had only risen to 33% in 1970-71, and to 38% in 1980-81. Thereafter, it rose slowly to 43% in 1990-91, and thereafter shot up to 50% and 57% by 2000-01 and 2010-11, respectively; it rose even further to 60% by 2013-14.

The main marker of a proper structural change is a rising share of manufacturing in output, as seen in East Asia. The share of manufacturing, unfortunately, kept falling from 17.5% in 1980 to 15.7% in 1990. Although it picked up after the economic reforms of 1991, rising to 17.7% of the GDP in 1996, it fell again to 15.7% by 2000-01, recovering only after 2004. It remained between 16-17% between 2004 and 2012, stabilising at that level. However, after demonetisation and the consequent destruction of unorganised and MSME manufacturing, there was gradual decline in the share of manufacturing from the stable 16-17% of GDP. It fell each year, reaching 13% in 2020 before barely recovering to 14% in 2021—the lowest in 60 years. This dramatic fall in manufacturing’s contribution to output is also reflected in the sector’s employment.

While manufacturing employment had risen from 10.5% of total employment in 1999-2000 to 12.8% in 2012, it fell to 11.5% by 2019, falling further thereafter. Worse still, there was an absolute fall in total manufacturing employment from 2016 to 2019, for the first time in India’s post 1991 history. All said and done, the positive trajectory of structural change that was underway has been aborted, even reversed. This happened despite an aggressive ‘Make in India’ campaign!

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Another phenomenon in the last two years is truly astounding. One dimension of structural change is that not only is there a relative fall of agriculture in total workforce, but as non-farm work grows, there should have been an absolute fall in the numbers in agriculture. Economic development is normally accompanied by growing urbanisation and large-scale rural-to-urban migration. However, from 1950 onwards, for half a century, the pace of structural change was so slow until 2004-05 that while the share of total employment in agriculture was consistently falling, the absolute number of workers was still rising in agriculture. As the rate of population growth is relatively higher in rural areas with health and education services being relatively poorly provided, the reliance upon land as a source of livelihood barely diminished till 2004.

As a result, how low productivity was in agriculture can be gauged from the fact that after over two decades of development, in 1972-73, the share of agricultural employment in the total workforce was still 74%, while that workforce contributed 44% to India’s GDP. So slow was the pace of non-farm job generation that while agriculture’s contribution to GDP fell to 25% (from 44%) by 2001, the share of employment was still 60% in 2000.

However, for the first time in India’s post-Independence history, the GDP growth rate picked up after 2003-04 to 8% per annum, a rate maintained till 2013-14 on average. At the same time, non-farm jobs (which, between 1993-94 and 1999-2000 were growing at just over 3 million per annum) began to grow at the rate of 7.5 million per annum. Hence, 5.5 million workers on average were pulled out of agriculture into non-farm work each year, resulting in a massive cumulative 37 million fewer workers being dependent upon agriculture in 2012, compared to 2004. For the first time ever, the absolute number of farm workers fell in India-as seen during rapid structural transformation.

The tightening of the rural labour market with surplus labour in agriculture decreasing led to rising real wages in rural areas over the same period. These had been stagnant from 1996-2004. Rising rural wages resulted in urban wages also rising in a ratchet effect, contributed by the non-farm job growth. The rise in real wages led to rising personal consumption, which caused a fall in numbers of poor people. While the share of population below a consistent poverty line had fallen since 1973 from 55% in 1973 to 27% in 2004, never in India’s post-Independence history had the absolute number of poor fallen during this duration. However, because of the rise in jobs, real wages, and hence, consumption expenditure, the absolute number of poor fell between 2004 and 2012 by nearly 140 million for the first time ever.

However, as non-farm job growth fell post 2013 (to only 2.9 million per annum till 2019), the rate of exit from agriculture also fell. GDP growth fell sharply from 2016 for each quarter until Covid broke out. The ill-planned and sudden Covid national lockdown caused massive reverse migration on a historically unprecedented scale. In 2019, the number of workers in agriculture was 188 million; in the middle of 2020, that number had risen due to reverse migration by 45 million (unlike the government’s claim of 10 million). For anyone believing that the migration had reverted to cities in 2021, away from agriculture, the NSO data throws up a surprise-in 2021, 7 million additional people were working in agriculture compared to 2020. The trajectory of the structural transformation of 2004-2012 has not only been stalled, it has been reversed.

The author is Visiting professor, Centre for Development Studies, University of Bath, UK