SECTORAL IMBALANCE, STRUCTURAL CHANGE AND GROWTH: HOW DIFFERENT ARE INDIA AND CHINA?

Paper Number :WP/02/2021
Publication Date :Nov. 1, 2021

In comparing the historical experience of structural transformation in two large Asian economies, viz., India and China, we note that the high growth rate in India post-liberalization was marked by an absence of any rapid industrialization. The pace of structural change (i.e., economy moving from predominance of agriculture to industry and finally to services) has been much slower in India than in China. In fact, unlike China, India seemed to have skipped industrialization and seemed to have gone into services from agriculture. A stylization in terms of a reduced form VAR model with three variables, viz., GDP growth rate (growth), a structural change index (NAV); and weighted standard deviation of sectoral growth rates (SD), finds that while NAV matters more for China, its impact is quite small for India. We explore several hypotheses towards explaining the non-standard path of India’s structural transformation and argue that India’s experience may be explained in terms of several factors, such as, movements in inter-sectoral terms-of-trade dynamics; emergence of consumption as a primary growth driver; presence of structural constraints as captured by ease of doing business or logistic performance index; and inability of successful special economic zones. Finally, in terms of political economic structure, the heterogeneity and decentralization Indian economic decision making could have acted yet another impediment in India’s path of industrialization.