Occupational Structure versus Output Structure

One of the most important structural facts about the Indian economy is the mismatch between its occupational structure (how the workforce is distributed across sectors) and its output structure (how national income is distributed across sectors). A large share of India's workforce continues to be employed in agriculture, while agriculture's contribution to total national output is proportionately much smaller than its employment share — the reverse pattern of what is seen in developed economies, where a small share of the workforce in agriculture still produces a substantial and highly efficient output.

Why does this mismatch occur? The core reason is a large difference in productivity per worker across sectors. Industry and services typically employ more capital, technology and organisation per worker than agriculture does, especially agriculture practised on small, fragmented land-holdings with limited mechanisation and irrigation. As a result, output per worker (labour productivity) tends to be much lower in agriculture than in industry or services. When a very large number of workers share a comparatively small agricultural output among themselves, agriculture's share of total employment stays high even as its share of total income falls — because each additional worker in agriculture, particularly on an already fully-worked small holding, adds very little extra output (a pattern closely linked to the disguised unemployment discussed earlier in this chapter). …