Causal Links between Structural Change and Economic Growth in the Hilly Region of Northeast India

This chapter examines structural change in the economy of the hill states in northeast India. Structural change is characterized by a decrease in the share of agriculture in output and in the share of agricultural labour in the total labour force. Two types of indicators, structural indices and growth rates, were employed to find the causal links between structural change and economic growth. Economic growth was represented by growth rates computed from the National Accounts State Net Domestic Product (NSDP), while for structural change, two types of indices, the Norm of Absolute Values (NAV) index and Modified Lilien Index (MLI), were constructed. Panel regressions were used to find the causative relationship between economic growth and structural change. The trends in indices showed that structural changes were taking place in the states of northeast India. In the states of Assam and Meghalaya, there was continuous rise in the values of the index over the years, indicating a steady structural transformation, while in other states, drastic changes were observed in a few years, indicative of erratic trends in the diversion of resources among the sectors. The estimates showed a two-way causative relation between structural change and economic growth. Economic growth had positive and significant effects on both MLI and NAV, and in turn the structural change indices also positively reinforced economic growth. However, the magnitude of effect was greater for structural change (both indices) on growth than the other way around. Thus, policies should be directed towards effecting favourable and faster structural change in order to bring economic growth in the region. Sustained economic growth depends on the simultaneous increase in productivity in agriculture and non-farm sectors, fostering labor movement toward more productive activities and accelerating structural change.