How does the structural change of the last 30 years compare with that of the 30 years preceding liberalisation?

The share of agriculture in GDP shrinks while that of industry is supposed to increase.

We all know that economic liberalisation led to higher growth. We know that economic freedom resulted in a cornucopia of products, the likes of which could not be imagined thirty years ago. We know how it set free the equity markets and energised entrepreneurship and expanded the private sector. But how much did the basic macro structure of the Indian economy change? How does the structural change in the macro economy of the last thirty years compare with that of the thirty years preceding liberalisation?

One of the most important markers of structural change in a developing economy is the share of GDP contributed by agriculture and allied sectors. That’s because the usual trajectory of development has been a shift from agriculture to industry and then to services. The share of agriculture in GDP shrinks while that of industry is supposed to increase.

Take A Look At Agriculture

Agriculture has indeed diminished in importance in the Indian economy. In the last thirty years, between 1991-92 and 2020-21, the share of agriculture and allied sectors in gross value added (GVA) went down by 10 percentage points. What’s interesting, though, is that the share of agriculture had gone down even more—by 13.1 percentage points—in the preceding thirty year period between 1961-62 and 1990-91. At least in this respect, there seems to have been more structural change in the pre-liberalisation period than post-liberalisation.

But 2020-21 was an exceptional year, on account of the pandemic. Even if we take the period 1991-92 to 2019-20, though, the share of agriculture went down by 11.8 percentage points. Yes, it’s easier to get the share of agriculture down when it is high compared to when it’s lower, but the fact remains that there really has been no acceleration in the pace of structural change if you go by this yardstick.

We’ve taken the GVA and GDP numbers at current prices because the constant prices series has changed several times over the years, making comparison difficult.

What About Share Of Industry?

The share of industry (including construction) fell by 3.3 percentage points in the thirty years since liberalisation, compared to an increase of 7.7 percentage points in the preceding thirty years. The classical development pattern---from agriculture to industry to services---did not happen in India’s case, despite liberalisation.

Nor does the picture change by much if we exclude the pandemic year 2020-21. The accompanying Chart 1 shows how the structure of the economy has changed between 1991-92 and 2020-21 and between 1961-62 and 1990-91.

As the chart shows, the share of manufacturing in GVA has dipped in the last thirty years, while it went up a bit in the earlier thirty year period. The share of construction too went up by much more in the thirty years before liberalisation.

The share of services, on the other hand, increased by 12.2 percentage points after liberalisation, compared to a rise of a mere 0.3 per cent in the thirty years prior to liberalisation. If we exclude 2020-21, the share of services has gone up by even more—13.2 percentage points---after liberalisation.

Within services, the big change has been in the share of ‘financial services, real estate and professional services’. While the share of this sector fell by 5.9 percentage points in the thirty years prior to liberalisation, it went up by 5.8 percentage points in the thirty years after liberalisation.

As the economy has developed, the share of consumption has come down while that of capital formation has increased. But, as Chart 2 shows, the share of private consumption went down far more in the thirty years prior to liberalisation than in the thirty years after it. The share of gross fixed capital formation, on the other hand, went up far more during the pre-liberalisation period.

One of the most obvious ways in which liberalisation has changed the structure of Indian industry is that it has become far more open, as both export and import barriers were taken down. The share of exports in GDP went up by 10.2 percentage points since liberalisation, compared to a mere 2.8 percentage points in the preceding thirty year period. The improvement in the share of imports is even starker.

Simply put, while liberalisation has led to many structural improvements and Indian business has become much more globally competitive, the data show that, in some important aspects, the change in the basic macroeconomic structure of the economy was even greater in the pre-liberalisation period.