Chapter 2: Sectors of the Indian Economy
This chapter analyzes India's economic structure through the lens of three sectors—primary, secondary, and tertiary—examining their relative contributions, employment patterns, and the structural transformation expected in developing economies. We investigate why India's growth has been services-led rather than following the traditional industrialization path, and the implications for employment and inequality.
1. Understanding Economic Sectors
Economic sectors categorize economic activities based on the nature of work: primary (extraction of raw materials), secondary (manufacturing and processing), and tertiary (services). This classification helps analyze structural transformation as economies develop from agriculture-dominated to industry and services-led.
- The Three-Sector Model: Colin Clark and Simon Kuznets established that as economies develop, labor and output shift from primary to secondary to tertiary sectors. This reflects changing consumption patterns, technological progress, and rising incomes.
- India's Atypical Pattern: Unlike most developed countries that industrialized first, India is experiencing "premature deindustrialization" with services growing faster than manufacturing. Services contribute 55% to GDP while employing only 31% of workforce.
- Informal vs Formal Economy: Beyond sectoral classification, India's economy is divided into organized (registered, regulated, with social security) and unorganized (small, unregistered, no benefits) sectors. 90% of workforce is in informal employment.
Critical Insight: The mismatch between sectoral GDP contributions and employment shares creates India's structural dualism: high-productivity organized sector employs few, while low-productivity informal sector employs most. This explains why rapid GDP growth hasn't created enough good jobs.
2. Structural Transformation of Indian Economy
India's sectoral composition has evolved through distinct policy regimes:
- Pre-Independence (till 1947): Agriculture-dominated (55% GDP, 70% workforce). Limited industry (textiles, jute) concentrated in few regions. Services limited to basic trade and administration.
- Planning Era (1950-1990): Emphasis on heavy industry (Mahalanobis model). Public sector dominated capital-intensive sectors. Agriculture share declined but employment share remained high. "Hindu rate of growth" 3-4% annually.
- Post-Reform Period (1991-2020): Services-led growth especially IT, telecom, finance. Manufacturing share stagnated around 15-17% of GDP. Agriculture declined to 15% GDP but still employs 43% workforce.
- Recent Initiatives (2014-present): Make in India to boost manufacturing share to 25% GDP. Production Linked Incentives (PLI) for electronics, pharmaceuticals, automobiles. Focus on formalization through GST, digital payments.
3. Sectoral GDP Contribution Evolution
- Agriculture: 38%, Industry: 26%, Services: 36%
- Green Revolution increased farm productivity
- Public sector industries expanded but inefficient
- Agriculture: 23%, Industry: 27%, Services: 50%
- IT boom following Y2K and internet expansion
- Telecom revolution began
- Agriculture: 15%, Industry: 30%, Services: 55%
- Manufacturing: 17% of GDP (stagnant for decades)
- Services highly productive, industry moderately, agriculture low productivity
4. Sectoral Characteristics and Challenges
Three Sectors: Comparative Analysis
| Sector | GDP Contribution | Employment Share | Key Features | Major Challenges |
|---|---|---|---|---|
| Primary (Agriculture & Allied) | 15% (2023) | 43% (2023) | Seasonal employment, monsoon dependent, small holdings | Low productivity, climate vulnerability, indebtedness |
| Secondary (Industry) | 30% (Manufacturing: 17%) | 25% | Capital intensive in organized sector, labor intensive in informal | Stagnant manufacturing share, regulatory hurdles, skill gaps |
| Tertiary (Services) | 55% | 32% | Heterogeneous: high-end IT to informal domestic work | Jobless growth in formal services, informality in traditional services |
Organized vs Unorganized Sector Comparison
| Aspect | Organized Sector | Unorganized Sector | Policy Implications |
|---|---|---|---|
| Size | 10% of workforce, 50% of GDP | 90% of workforce, 50% of GDP | High productivity-small employment vs low productivity-mass employment |
| Job Security | Formal contracts, social security | Casual, no benefits, vulnerable | Need for extending social protection to informal workers |
| Productivity | High (capital, technology, skills) | Low (traditional methods, limited capital) | How to raise informal sector productivity |
| Examples | Public sector, large corporations, IT companies | Small shops, street vendors, construction workers, domestic help | Different policy approaches needed for each |
5. Employment Challenges and Policy Responses
A. The Employment Crisis
- Jobless Growth: GDP grew 6-7% annually (2000-2020) but employment grew only 1-2%. Services growth was capital-intensive (IT requires few workers relative to output), manufacturing automation reduced labor needs.
- Informalization: Even formal sector increasingly uses contract workers without benefits. 71% of formal manufacturing workers are contract laborers without job security or benefits.
- Disguised Unemployment: Agriculture has surplus workers whose marginal productivity is near zero. They appear employed but could be removed without affecting output.
- Youth Unemployment: 23% of graduates unemployed (2022) versus 4% illiterates. Education not aligned with job market needs.
B. Government Initiatives
- Make in India (2014): Target: raise manufacturing to 25% GDP by 2025. Focus sectors: electronics, defense, automobiles, pharmaceuticals. Production Linked Incentives (PLI) worth ₹1.97 lakh crore for 14 sectors.
- Skill India Mission (2015): Train 400 million people by 2022. Pradhan Mantri Kaushal Vikas Yojana provides short-term training, recognition of prior learning.
- MGNREGA (2005): Provides 100 days of guaranteed wage employment to rural households. Safety net during agricultural lean seasons, creates rural infrastructure.
- Startup India (2016): Support entrepreneurship through tax benefits, easier compliance, funding. 84,000+ startups recognized, 107 unicorns (2023).
The Middle-Income Trap Concern: Countries that grow from low to middle income often stagnate there, unable to compete with low-wage producers or high-tech innovators. India risks this trap if manufacturing doesn't upgrade and services don't create mass employment. Need to move from factor-driven to efficiency and innovation-driven growth.
6. Economic Sectors Memory Aids
Sectoral Classification: P.S.T. - Primary (Agriculture), Secondary (Industry), Tertiary (Services). Remember: "Please Study Today" for sector order.
GDP Contribution Trend: A.I.S. - Agriculture declining, Industry stagnant, Services rising. Remember: "Always Invest Smartly" for sectoral shifts.
Employment Challenges: J.I.D.Y. - Jobless growth, Informalization, Disguised unemployment, Youth unemployment. Remember: "Jobs Improve Daily Youth" for key issues.
7. Important Economic Policies
Sector-Specific Policies:
- Agriculture: PM-KISAN (₹6,000/year to farmers), PMFBY (crop insurance), e-NAM (national agricultural market). Need: diversification from cereals to horticulture, dairy, fisheries.
- Industry: PLI schemes for electronics (mobile manufacturing), pharmaceuticals, automobiles. National Manufacturing Policy (2011) target: 25% GDP, 100 million jobs by 2022 (missed).
- Services: Digital India for IT services expansion, National Tourism Policy, PMJDY for financial inclusion. Challenge: creating quality jobs beyond IT/ITeS.
Employment Generation Schemes:
- MGNREGA: World's largest employment guarantee scheme. 273 million person-days generated (2022-23). Criticisms: delayed payments, corruption, but important safety net.
- PMSVANidhi: Micro-credit to street vendors. 4.2 million beneficiaries (2023). Supports informal sector entrepreneurship.
- ASPIRE: Promotion of rural entrepreneurship through incubation, funding. 100 Livelihood Business Incubators, 100 Technology Business Incubators targeted.
8. Essential Economic Terminology
Gross Value Added (GVA): Value of output minus value of intermediate consumption. Sectoral GVA sums to GDP. More accurate than GDP for sectoral analysis as it excludes taxes and subsidies. Agriculture GVA: ₹23 lakh crore (2022-23).
Disguised Unemployment: Situation where more people are employed than needed. Removing some workers wouldn't reduce output. Common in Indian agriculture where family labor shares limited work. Seasonal in nature (busy in sowing/harvest, idle other times).
Organized Sector: Enterprises registered with government, following various laws (Factories Act, Minimum Wages Act, etc.). Provide formal employment contracts, social security benefits. Represent 10% of employment but 50% of GDP.
Unorganized Sector: Small, unregistered enterprises with less than 10 workers. Not covered by most labor laws. Workers lack job security, social benefits. 90% of India's workforce, contributes 50% to GDP but with low productivity.
Sectors of Economy Revision Focus
Exam Strategy: Use current data (2023-24 statistics) for sectoral shares. Discuss both historical trends and future challenges. Connect sectoral analysis to employment issues. For policy questions: Problem identification → Policy responses → Implementation challenges → Suggested improvements. Use specific schemes as examples.
Note: Sectoral analysis connects to current debates: farm laws repeal, manufacturing competitiveness, IT sector challenges, gig economy growth. Understanding the mismatch between sectoral GDP contributions and employment is key to analyzing India's development paradox. Recent focus on Atmanirbhar Bharat and manufacturing self-reliance makes industrial policy particularly relevant.
