Mapping India’s Economic Transition: Sectoral Shifts, Labour Productivity, and Regional Inequality in a Policy Framework for Balanced Development

This study investigates the role of structural transformation in shaping labour-productivity growth across Indian states over the past three decades, applying a decomposition framework that separates within-sector efficiency gains from between-sector labour shifts. Using state-level panel data, the analysis derives a Structural Transformation Index (STI) to quantify the extent to which workers move from low-productivity to high-productivity activities. The results reveal substantial interstate heterogeneity. At the national level, approximately one-third of aggregate productivity growth is attributable to labour reallocation, driven largely by the gradual exodus from agriculture into manufacturing and modern services. However, the magnitude of this effect varies widely: states such as Maharashtra, Tamil Nadu, and Gujarat demonstrate pronounced reallocation dynamics, underpinned by diversified industrial bases, expanding service clusters, and relatively flexible labour markets. In contrast, lagging states exhibit a more muted structural shift, relying predominantly on incremental efficiency improvements within low-productivity agriculture. These disparities reflect deeper differences in human-capital quality, institutional effectiveness, and patterns of labour mobility. The analysis shows that education and skill development raise productivity most strongly where institutional settings support capital–skill complementarities, technological adoption, and the smooth absorption of workers into dynamic sectors.