Sectors of the Indian Economy
Chapter 2: Sectors of the Indian Economy
Notes for the Teacher
Understanding the Indian economy requires studying its various sectors, which can be classified based on different criteria.
Three main classifications are discussed:
Primary, Secondary, and Tertiary sectors
Organized and Unorganized sectors
Public and Private sectors
Encourage discussion by relating these classifications to students' daily lives using familiar examples.
Emphasize the changing roles of these sectors, especially the rapid growth of the service sector.
Introduce fundamental concepts like Gross Domestic Product (GDP) and employment using examples to aid understanding.
Activities and exercises can help students classify activities into different sectors.
Encourage students to interact with working people like shop owners, laborers, vendors, mechanics, and domestic workers to understand their lives and work.
Students can then develop their own classifications of economic activities based on this information.
Highlight problems caused by sectoral shifts, using unemployment as an example and discussing government solutions.
Relate the declining importance of agriculture and the increasing importance of industry and services to students' observations in their daily lives.
Use media information to support these discussions, encouraging students to bring newspaper cuttings and stories for class discussion.
When discussing the unorganized sector, emphasize the need to protect workers in this sector.
Encourage students to visit unorganized sector enterprises to gain firsthand experience.
Data on Gross Value Added (GVA) is sourced from the Economic Survey, which is a valuable resource for understanding the Indian economy.
Employment figures are based on data from the National Sample Survey Organisation (NSSO), now known as the National Statistical Office (NSO).
Website for NSO: http:/mospi.gov.in.
Employment data is also available from sources like the Census of India.
Sectors of Economic Activities
Economic activities involve producing goods and services.
These activities can be grouped or classified into sectors based on specific criteria.
Primary Sector
Activities that directly use natural resources, e.g., cultivation of cotton where growth depends on natural factors like rainfall, sunshine, and climate.
Products from this sector are natural products, e.g., cotton, milk (dependent on biological processes of animals and fodder availability), minerals, and ores.
Forms the base for all other products.
Also called the agriculture and related sector because most natural products come from agriculture, dairy, fishing, and forestry.
Secondary Sector
Natural products are changed into other forms through manufacturing.
The product is not directly produced by nature but made through a manufacturing process in factories, workshops, or at home.
Examples: spinning yarn and weaving cloth from cotton fiber, making sugar or gur from sugarcane, converting earth into bricks for houses and buildings.
Also called the industrial sector due to its association with various industries.
Tertiary Sector
Activities that aid the development of the primary and secondary sectors.
These activities do not produce goods but support the production process.
Examples: transporting goods via trucks or trains, selling goods in wholesale and retail shops, storing goods in godowns, communication via telephone or letters, banking to help production and trade.
Transport, storage, communication, banking, and trade are tertiary activities.
Also called the service sector since these activities generate services rather than goods.
Includes essential services like teachers, doctors, washermen, barbers, cobblers, lawyers, and administrative and accounting work.
New services based on information technology, such as internet cafes, ATM booths, call centers, and software companies, have become important.
Interdependence of Sectors: Examples
If farmers refuse to sell sugarcane to a sugar mill, the mill shuts down. This highlights the secondary sector's dependence on the primary sector.
If companies import cotton instead of buying from India, cotton cultivation becomes less profitable, and farmers may go bankrupt.
Increase in prices of inputs like fertilizers or pumpsets increases the cost of cultivation and reduces farmers' profits.
If transporters go on strike, food becomes scarce in urban areas, and farmers cannot sell their products, illustrating the reliance of industrial and service sectors on the primary sector for food.
Comparing the Three Sectors
Economic activities are grouped into three categories but are highly interdependent.
Calculating Total Production
The various production activities in the primary, secondary, and tertiary sectors produce a large number of goods and services.
It is important to measure how much goods and services are produced and how many people work in each sector.
One or more sectors may dominate in terms of total production and employment.
Economists suggest using the values of goods and services rather than actual numbers to calculate total production.
For example, if 10,000 kgs of wheat are sold at Rs 20 per kg, the value of wheat is Rs 2,00,000. Similarly, the value of 5,000 coconuts at Rs 15 per coconut will be Rs 75,000. \text{Value} = \text{Quantity} \times \text{Price}
Only final goods and services should be included to avoid double-counting.
Final goods are goods that reach the consumers.
Intermediate goods (e.g., wheat, flour) are used in producing final goods.
The value of final goods includes the value of all intermediate goods used in making them.
Gross Domestic Product (GDP)
The value of final goods and services produced in each sector during a particular year is the total production of that sector for the year.
The sum of production in all three sectors is the Gross Domestic Product (GDP) of a country.
GDP is the value of all final goods and services produced within a country during a particular year.
GDP indicates the size of the economy.
In India, the central government ministry measures GDP with the help of government departments in states and union territories.
Recently, the Indian Government began to bring out the contribution of the three sectors towards Gross Value Added (GVA).
GVA measures the contribution of the three sectors of an economy after adjusting for taxes and subsidies.
Historical Change in Sectors
In the initial stages of development, the primary sector is the most important economic activity.
As farming methods improve, the agriculture sector prospers, producing more food.
More people take up activities like craft-making and trading.
Most goods produced are natural products from the primary sector, and most people are employed in this sector.
With new manufacturing methods, factories expand, and many people move from farms to factories.
The secondary sector becomes the most important in total production and employment.
Over time, there is a shift from the secondary to the tertiary sector in developed countries.
The service sector becomes the most important sector in terms of total production, employing most working people.
Sectoral Shift in India
Graph 1 shows the production of goods and services in the three sectors for 1977–78 and 2017–18.
The total production has grown over these forty years.
The tertiary sector has increased the most, emerging as the largest producing sector in India in 2017–18, replacing the primary sector.
Rising Importance of the Tertiary Sector
Several reasons for the tertiary sector's growth:
Basic services like hospitals, educational institutions, post and telegraph services, police stations, courts, administrative offices, transport, banks, and insurance companies are required.
The government is responsible for providing these services in developing countries.
Development of agriculture and industry leads to the development of services like transport, trade, and storage.
As income levels rise, people demand more services like eating out, tourism, shopping, private hospitals, private schools, and professional training.
New services based on information and communication technology have become important.
Not all of the service sector is growing equally well.
Some services employ highly skilled and educated workers, while others engage a large number of workers as small shopkeepers, repair persons, and transport persons who barely earn a living.
Employment in the Three Sectors
Graph 2 presents the percentage share of the three sectors in GVA showing the changing importance of the sectors over forty years.
A shift in employment similar to the shift in GVA has not occurred in India.
Graph 3 shows the share of employment in the three sectors in 1977-78 and 2017-18.
The primary sector remains the largest employer.
Not enough jobs were created in the secondary and tertiary sectors.
Industrial output increased significantly, but employment in the industry only increased threefold.
Production in the service sector rose significantly, but employment only rose around five times.
More than half of the workers are in the primary sector, mainly agriculture, producing about one-sixth of the GVA.
The secondary and tertiary sectors produce the rest while employing less than half the people.
Underemployment
Workers in agriculture are not producing as much as they could because there are more people in agriculture than necessary.
Moving some people out will not affect production.
Workers in the agricultural sector are underemployed.
Example: Laxmi, a small farmer with two hectares of unirrigated land, has all five family members working on the plot throughout the year, but each is underemployed.
This underemployment is hidden or disguised unemployment.
If a landlord hires one or two family members, the family can earn extra income, and production on their farm is not affected.
Even if many people are removed from the agricultural sector and provided with proper work elsewhere, agricultural production will not suffer.
Incomes increase when people take up other work.
Underemployment also occurs in the service sector, where casual workers search for daily employment but don't always find work.
Creating More Employment
There is considerable underemployment and unemployment in agriculture.
Government spending or bank loans can help construct wells for irrigation, allowing farmers to take a second crop.
One hectare of wheat can provide employment to two people for 50 days.
Construction of new dams and canals can lead to significant employment generation within the agricultural sector.
Investing in transportation and storage of crops, and improving rural roads, enables farmers to grow and sell crops.
Providing cheap agricultural credit to farmers enables them to buy seeds, fertilizers, agricultural equipment, and pumpsets.
Identifying, promoting, and locating industries and services in semi-rural areas can employ many people.
Examples: setting up a dal mill to process pulse crops, opening a cold storage for potatoes and onions, starting honey collection centers in villages near forest areas, and industries that process vegetables and agricultural produce.
India has a large population in the 5-29 age group, but only about 51% attend educational institutions.
More schools, teachers, and staff are needed to educate these children.
A study estimates that nearly 20 lakh jobs can be created in the education sector alone.
Improving the health situation requires more doctors, nurses, and health workers in rural areas.
Every state or region has the potential for increasing income and employment through tourism, regional craft industries, or new services like IT, which require planning and government support.
If tourism improves, it can give additional employment to more than 35 lakh people every year.
Short-term measures are also needed, such as MGNREGA 2005, which guarantees 100 days of employment in a year to those in need of work in rural areas; if the government fails to provide employment, it gives unemployment allowances.
Organized vs. Unorganized Sectors
Another way to classify economic activities is based on employment conditions.
The organized sector has formal processes and procedures with regular terms of employment and assured work.
These enterprises are registered by the government and follow rules and regulations outlined in laws such as the Factories Act, Minimum Wages Act, Payment of Gratuity Act, and Shops and Establishments Act.
Workers have security of employment and work fixed hours, with overtime pay.
Benefits include paid leave, payment during holidays, provident fund, gratuity, and medical benefits.
The factory manager ensures facilities like drinking water and a safe working environment.
Workers receive pensions upon retirement.
The unorganized sector consists of small, scattered units largely outside government control.
Rules and regulations exist but are not followed.
Jobs are low-paid and irregular, with no provision for overtime, paid leave, holidays, or sick leave.
Employment is not secure, and people can be asked to leave without reason.
During slow seasons, some people may be asked to leave.
This sector includes self-employed individuals doing small jobs like street vending or repair work, and farmers hiring laborers as required.
Protecting Workers in the Unorganized Sector
The organized sector offers sought-after jobs, but employment opportunities are expanding slowly.
Many organized sector enterprises operate in the unorganized sector to evade taxes and avoid labor protection laws, resulting in workers forced into low-paying, unsecure, and exploitative jobs in the unorganized sector.
Since the 1990s, many workers have lost jobs in the organized sector and have been forced to take up jobs in the unorganized sector with low earnings.
Protection and support are needed for workers in the unorganized sector.
In rural areas, the unorganized sector includes landless agricultural laborers, small and marginal farmers, sharecroppers, and artisans (weavers, blacksmiths, carpenters, and goldsmiths).
Nearly 80% of rural households are small and marginal farmers, who need support through timely delivery of seeds, agricultural inputs, credit, storage facilities, and marketing outlets.
In urban areas, the unorganized sector includes workers in small-scale industry, casual workers in construction, trade, and transport, street vendors, head load workers, garment makers, and rag pickers.
Small-scale industry needs government support for procuring raw materials and marketing of output.
Casual workers in rural and urban areas need protection.
Most workers from scheduled castes, tribes, and backward communities are in the unorganized sector and face social discrimination.
Protection and support to the unorganized sector workers are necessary for economic and social development.
Classifying Economic Activities
Classification helps to analyze a situation.
Dividing economic activities into primary, secondary, and tertiary sectors uses the ‘nature of activity’ as the criterion, which helps analyze total production and employment in India.
Dividing economic activities into organized and unorganized sectors allows us to look at employment in the two sectors.
Public and Private Sectors
Economic activities can also be classified based on ownership of assets and responsibility for service delivery.
In the public sector, the government owns most assets and provides all services.
In the private sector, ownership of assets and service delivery are in the hands of private individuals or companies.
Examples: railways and post offices (public sector), Tata Iron and Steel Company Limited (TISCO) and Reliance Industries Limited (RIL) (private sector).
Activities in the private sector are guided by the motive to earn profits.
Governments raise money through taxes to meet expenses on services rendered by the public sector.
Modern governments spend on activities that the private sector will not provide at a reasonable cost because they require large sums of money and are difficult to collect payment for, e.g., construction of roads, bridges, railways, harbors, generating electricity, and providing irrigation through dams.
Governments support activities that the private sector may not continue without encouragement.
For example, the government supplies electricity at affordable rates to industries and bears part of the cost.
The government buys wheat and rice from farmers at a ‘fair price,’ stores it, and sells it at a lower price to consumers through ration shops, supporting both farmers and consumers.
The government provides health and education facilities, runs schools, provides quality education, and addresses aspects of human development such as safe drinking water, housing, and food and nutrition.
The government takes care of the poorest regions through increased spending.
Summing Up
Economic activities can be classified into primary, secondary, and tertiary sectors.
In India, the tertiary sector contributes the most to GDP, but employment remains mainly in the primary sector.
Employment opportunities in the country can be increased.
People work in organized or unorganized sectors, with most in unorganized sectors needing protection.
Private and public activities differ, with public activities focusing on certain areas.