Economic growth structural change and the Kuznets hypothesis an empirical investigation of Indian economy

Abstract

The present study attempts to examine the link between Economic Growth and Structural Change and investigate the empirical validity of the Kuznets Hypothesis in India. The study is based on secondary data and the time series analysis has been carried out using the unit root tests (ADF, PP, KPSS, and ADF Breakpoint Test), OLS method, VAR Model, ARDL method, and Toda-Yamamoto Causality Test. The findings suggest significant causal relationship between economic growth and structural change indicators with unidirectional causality from structural change in value added to economic growth, changes in employment and urbanization, and from productivity to economic growth and changes in value added. However, these shifts in employment and urbanization do not result in economic growth. Further, regarding the distributive aspects of this growth process, the results reveal a U-shaped relationship between economic growth and income inequality (rather than the Kuznets inverted-U) and between industry/services value added and income inequality, with the U-shaped pattern of services resembling growth-inequality relationships. With these shifts, though the employment changes have occurred at a far lower rate than value added, the agriculture-services employment transition has resulted in a limited impact on income distribution. This in turn has widened the productivity gap between sectors, resulting in rising disparities. In light of these conclusions, the study has suggested that besides encouraging structural transformation, which is essential for long-term growth, the benefits of structural transformation must reach bottom income groups as well by increasing emphasis on financial services and human capital formation. newline