Analyzing the Impact of Structural Change on Aggregate Productivity in Indian States: A Three Sector Study

In this paper, we present the substantial disparities in sectoral labour productivity across Indian states from 1983 to 2017. We decompose the change in aggregate labour productivity into two components - ‘within sector’ and ‘reallocation’ - utilizing a three sector disaggregation. Reallocation, or structural transformation, contributes modestly to productivity changes for all states except Punjab. Productivity growth in agriculture and manufacturing sectors is nearly identical, while growth in services consistently outpaces both. Regarding the contribution of different sectors to aggregate productivity growth, agriculture remains the primary contributor in four states, whereas growth within the tertiary sector dominates in other 10 states. Gujarat stands out as the only state where manufacturing contributes the most to its aggregate productivity growth, underscoring the stagnancy of manufacturing in the growth dynamics of the remaining states. The variance in productivity across states is most pronounced in agriculture, with no indication of these sectoral productivity variances diminishing over time. States that exhibited the highest level of agricultural productivity in 1983 (Punjab, Gujarat, Kerala, Haryana) witnessed the greatest decline in its agricultural labour share over the subsequent 35 years. However, the structural change component in their productivity change is not notably high. This signifies the prominent role of ‘within sector’ productivity change, accounting for approximately 81% of overall productivity growth of states.