"If we set the output per worker in agriculture equal to one, then output per worker in industry is five and that in services 3.8," he said. "In other words, even at the current productivity levels in each sector, moving one percentage-point workers out of agriculture into industry can increase the GDP (Gross Domestic Product) by 1.5 per cent," Mr Panagariya said at the National Conference of Chief Secretaries in New Delhi.
He said underemployment is probably India's biggest economic challenge. "Our enterprises are excessively small and they have remained so." Mr Panagariya said raising productivity requires creating a policy environment that will help enterprises grow bigger.
"We must specifically look for policies that keep the enterprises small. Micro must grow into small, small into medium and medium into large," he said.
He said the level of per-capita income limits the scope for redistribution. Citing an example, Mr Panagariya said Bihar has far less room for redistribution than Kerala, but even Kerala has limits to how far it can rely on redistribution. "Politically, redistribution is lot more feasible if the overall income is growing rapidly," he said.
He said if India wants to increase total expenditures on education, health and infrastructure then the country has only two options. "We either cut expenditure on something else or increase the GDP. Unfortunately, our ability to cut the expenditure on items other than education, health and infrastructure is extremely limited. Therefore, raising the GDP is the only practical option," he said.