Structural Change, Industrialization and Poverty Reduction: The Case of India

This paper analyses the growth-structural change-poverty linkages within the framework of the New Structural Economics using Indian data for the period since 1951-52. It finds that the Indian economy has recorded substantial improvement in its GDP growth performance over the past three decades with average rates of growth going up and fluctuations coming down. The growth of the economy has been accompanied by a changing sectoral distribution of GDP towards high productivity sectors in particular services. However, the changing sectoral distribution of GDP has not been matched by a commensurate change in the distribution pattern of the labour force, as the agricultural sector and other low productivity sectors continue to dominate employment. Significantly, India’s pattern of growth has not been characterised by a change in the structure of employment towards manufacturing, with the share of this sector in total employment stagnating, and recently declining, despite growth of output. Even within this sector, the resource and labour intensive low tech sectors remain the largest employers. The mismatch between the sectoral patterns of value added and employment has led to wide wage differentials across sectors. This raises an important question about the impact of growth on poverty. This is because growth is poverty reducing only if it ‘enables the poor to actively participate in and significantly benefit from economic activity’. The present study finds that growth has indeed been accompanied by important reductions in poverty levels, but sizable population still remains stuck in poverty. The lack of structural change in the right direction seems to have impeded the poverty reducing effects of growth. We have shown that job creation by industrial expansion is clearly the way forward along with redistributive policies to solve poverty problems. While fostering industrialization India could pursue strategic import substitution and leverage the large domestic market that has now developed in several modern sectors.