Structural transformation of the Indian states: heterogeneity among them in a ten-sector economy

Purpose This paper aims to analyse the pattern of structural transformation and productivity growth of 15 major Indian states at a ten-sector level of disaggregation from 1983 to 2017. Design/methodology/approach The analysis has been carried over in a ten-sector disaggregated level through construction of the labour and output data from various micro data sets. Findings The majority of Indian states have bypassed the stage of industrialization, wherein labour previously engaged in agriculture has transitioned directly into the modern services sector while skipping the manufacturing. There are no sign of convergence of sectoral productivities and the heterogeneity among Indian states persists throughout the time period. The growth performance of states are not positively associated with the movement of labour across sectors as measured by the structural transformation index (STI). This goes against the narrative that structural transformation help reduce the misallocation of factors. Despite an increase in educational attainment of workers across all sectors, more than one-third of agricultural workers still remain either illiterate or lack formal schooling. Among sectors, construction (C) and trade, hotels and restaurants (THR) have absorbed the majority of workers who have left agricultural jobs. Finance, insurance, real estate and business services (FIRB), electricity, gas and water supply (EGWS) and mining and quarrying (MQ) are the three sectors that have seen significant gains in labour productivity during the study period. Originality/value To the best of the authors’ knowledge, this is the first attempt to analyse structural change and productivity growth in the Indian economy using Indian states as critical geographical marker. The results are new and add value to the literature.