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India's economy comprises three key sectors: the primary sector, which involves activities like agriculture, mining, and fishing; the secondary sector, which includes manufacturing industries; and the tertiary sector, encompassing services like IT, healthcare, and banking. Over the years, India has witnessed a shift from an agrarian-based economy to one driven largely by services, with the tertiary sector dominating GDP. While the primary sector remains vital for livelihoods, the secondary sector's contribution to GDP and employment has remained stagnant. Efforts to boost the manufacturing sector, particularly through MSMEs, are crucial for fostering economic growth, creating job opportunities, and realising the vision of a $5 trillion economy.
The primary sector involves agriculture and related activities like farming, fishing, and forestry.
The secondary sector includes manufacturing and industrial activities such as production of goods.
The tertiary sector, also called the service sector, encompasses services like healthcare, education, IT, and telecommunications.
The primary sector provides essential resources and sustenance, serving as the foundation of the economy.
The tertiary sector fuels innovation, offers various services, and contributes significantly to economic growth and employment.
In the early stages of civilization, all economic activities fell under the primary sector, primarily focused on agriculture and resource extraction. However, with increasing food surplus came a rise in demand for other goods, leading to the emergence of the secondary sector, particularly during the industrial revolution of the nineteenth century. This sector's growth necessitated auxiliary support, with industries like transportation and finance, which comes under tertiary sector, playing pivotal roles. Understanding these sectors is crucial for grasping the dynamics of India's economy and its evolution over time.
India has moved from a primary sector focused economy dependent on agriculture at the time of independence to a tertiary sector, i.e., one focused on services. The turning point came in 1991 amidst a balance-of-payments crisis when economic reforms were initiated, spearheaded by the Narasimha Rao government. These reforms dismantled the Licence Raj, reduced tariffs, and opened doors to foreign direct investment. Since then, liberalisation has been a consistent theme, albeit with challenges in addressing issues like labour laws and agricultural subsidies. This shift has propelled India from being the world's ninth-largest economy in 2010 to the fifth-largest by nominal GDP in 2019, surpassing major economies like the UK, France, Italy, and Brazil.
The Indian economy operates through various sectors, each serving distinct purposes in its growth and functioning. These sectors are categorised based on ownership, labour conditions, and operational nature. The primary, secondary, and tertiary sectors stand as the primary pillars of India's economic framework.
Primary Sector: The primary sector involves activities that directly utilise natural resources. It includes agriculture, mining, fishing, forestry, and dairy among others. This sector serves as the foundation for all other sectors, with about 54.6 percent of the workforce engaged in primary activities. Hence, it is the most labour intensive sector of Indian Economy. Agriculture, along with fisheries and forestry, contributes significantly to India's GDP, generating 18.20 percent of it. India has historically relied heavily on agriculture, being one of the world's largest producer of various crops such as groundnuts, wheat, sugar, freshwater fish, and milk.
Secondary Sector: The secondary sector comprises industries involved in manufacturing finished goods using materials sourced from the primary sector. This sector includes manufacturing, construction, and energy production. Currently, the secondary sector contributes around 25% to India's GDP. Despite its importance, its contribution to employment has decreased slightly over time, with approximately 28% of the workforce engaged in secondary activities. Jobs in this sector are known as blue-collar jobs. The primary and secondary sectors are often referred to as real sectors as they produce tangible goods.
Tertiary Sector/Service Sector: The tertiary sector comprises services provided in the economy, contributing over 54 percent to GDP and employing 27 percent of the workforce, also a significant portion of total FDI inflows. Activities in this sector support the growth of the primary and secondary sectors without directly producing tangible goods. Examples include tourism, transportation, banking, insurance, and finance. Jobs in this sector are known as white-collar jobs.
Sector Share towards GDP and Workforce
The quaternary sector emerged as a specialised domain within the broader service sector, focusing on knowledge-based activities. It represents the intellectual aspect of the economy, encompassing innovative processes that enhance the quality of services. This sector includes professionals working in fields such as education, healthcare, finance, research, and entertainment. These activities are crucial for driving innovation and advancing the economy's overall service capabilities.
The Quinary Sector is all about important jobs that focus on people's well-being and making crucial decisions. These are jobs where people work with ideas, help others, and make decisions that affect a lot of people. They are not always about making money. Sometimes, people do these jobs without getting paid. They are also referred to as Gold Collar Jobs.
Agricultural Sector: After a period of stagnation, India's GDP per capita began rising in the late 1970s, primarily due to increases in agricultural productivity driven by the Green Revolution. However, since the early 1980s, agricultural growth has decelerated, with the sector being the laggard in economic growth. The structural change in the Indian economy is evident, with agriculture's share of output decreasing from 57% in 1955 to 15% in 2021. While there was a significant increase in agricultural output between 1962-83 and 1980-93, growth slowed down thereafter, averaging at 1.74% per annum since 1993. The decline in productivity post-reform period might be attributed to factors such as reduced public investment, shifting cropping patterns, and changes in the land-labour ratio.
Industrial Sector: The industrial sector witnessed substantial reforms post-1991, particularly in trade liberalisation and access to imported intermediate goods. However, these reforms had limited impact on productivity and innovation. Trade liberalisation played a significant role in increasing productivity growth in Indian manufacturing, but there was little evidence of creative destruction or product churning. The industrial sector remains dominated by incumbents, with limited new firm entry. While there has been growth, especially in organised manufacturing, challenges such as stringent bankruptcy laws and political connections of incumbents hinder new entrants.
Since 1991, there has been a persistent stagnation in the share of the manufacturing sector in India's GDP, hovering around 16-17%, with a parallel stagnancy in employment contribution, remaining at 12%. Notably, Micro, Small, and Medium Enterprises (MSMEs) constitute a significant portion, contributing about 45% to the manufacturing output. Therefore, enhancing the share of the manufacturing sector holds the potential to create forward-backward linkages in the economy, fostering job creation, and aligning with the vision of achieving a $5 trillion economy.
Services Sector: The services sector experienced rapid growth post-1991, with sectors like business services and communications leading the way. Economic reforms that relaxed foreign investment in services contributed to this growth, with the share of services in foreign direct investment increasing substantially. The service sector's growth has been diverse, with skill-intensive segments like information technology driving exports, while unskilled labour-intensive segments such as trade, hotels, and restaurants also contributing significantly. The services sector's share in GDP increased from 19% in 1955 to 54% in 2021, highlighting its importance in India's economic landscape.
India's economic journey since independence has been marked by significant growth and transformation across sectors. While the nation has emerged as one of the world's largest economies, with thriving modern industries and a dynamic IT sector, challenges persist. The agricultural sector's performance has been disappointing, as average productivity is half of the world and one-third of China, and job creation rates need improvement. Moreover, formal manufacturing, especially in export-oriented industries, requires attention. Regional disparities further underscore the need for balanced development. Looking ahead, India must focus on addressing these challenges to ensure inclusive growth and strengthen the economic foundation for all sectors and regions. By prioritising balanced development and leveraging its strengths, India can build a resilient and prosperous future for all its citizens.
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