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Classification Of Indian Economy

Classification Of Indian Economy

SECTORS OF ECONOMY 

Economic activity is divided into three sectors:

  • Primary: The primary sector of the economy makes direct use of natural resources. This includes agriculture, forestry, fishing, and mining. (A farmer and a coal mine worker would be workers in the primary sector.)
    • The industries engaged in the production or extraction of natural resources such as crops, oil, and ores are part of the primary sector.
  • Secondary: The secondary sector of the economy involves the transformation of raw or intermediate materials into final goods, e.g. manufacturing steel into cars, or textiles into clothing. (A welder and a dressmaker would be workers in the secondary sector.)
    • This sector generally takes the output of the primary sector and manufactures finished goods or intermediate goods. Many of these industries consume large quantities of energy and require factories and machinery to convert the raw materials into goods and products. They also produce waste materials and gases that may cause environmental problems or pollution. The secondary sector supports both the primary and the tertiary sector.

 

Largest countries by industrial output in nominal GDP, according to IMF and CIA World Fact Book, 2015 | Classification Of Indian Economy

Economy

China

United States

Japan

Germany

United Kingdom

India

Countries by industrial output
in 2015 (billions in USD)

4922
3752
1164
1016
588
559

 

  • Tertiary: The tertiary sector of the economy involves the supply of services to consumers and businesses, such as babysitting, cinema, and banking. (A shopkeeper and an accountant would be workers in the tertiary sector.)

GOODS AND SERVICES | Classification Of Indian Economy

  • Goods refer to tangible consumable products, articles, and commodities and have physical characteristics, i.e. shape, appearance, size, weight, etc. Some items are made for one-time use by the consumer, while some can be repeatedly used.
  • Goods are products that are traded in the market. There is a time gap in the production, distribution, and consumption of goods. When the buyer purchases goods and pays the price, the ownership is passed from the seller to the buyer.
  • Products are manufactured in batches, which produce identical units. In this way, a particular product offered by the company will have the same specifications and characteristics all over the market. Examples include books, pens, bottles, bags, etc.
  • Services lack physical identity and are thus intangible in nature. Services are produced and consumed at the same time. Services are considered sold at the time of their consumption. Services cannot be owned but can only be utilized.
  • For example, if one buys a ticket for watching a movie at the multiplex, it does not mean that one has purchased the multiplex, but one has only paid the price of availing services. Examples include retail, banking, insurance, transport, communication, courier delivery, etc.                    Classification Of Indian Economy

Index of Industrial Production and Core Sector

  • The index of industrial production (IIP) is a composite indicator that measures the short-term changes in the volume of production of a basket of industrial products during a given period. It is compiled and published monthly by the Central Statistical Organisation (CSO). The current base year for IIP is 2011-12 with a value of 100.
  • Eight core industries comprise nearly 38% of the weight of items included in the IIP
    • Electricity generation (weight: 10.32%)
    • Steel production (weight: 6.68%)
    • Petroleum refinery production (weight: 5.94%)
    • Crude oil production (weight: 5.22%)
    • Coal production (weight: 4.38%)
    • Cement production (weight: 2.41%)
    • Natural gas production (weight: 1.71%)
    • Fertilizer production (weight: 1.25%)                  Classification Of Indian Economy

What Are Core Industries?

  • Core industries are the backbone of the overall economy. Their output is used by various other industries. Thus, the core industries determine the state of overall industrial development of the economy.

COMPARISON OF INDIAN ECONOMY WITH ECONOMIES OF THE WORLD | Classification Of Indian Economy

 

No,         Country/Economy              Nominal GDP       Primary Secondary                Tertiary

World     75.6 trillion           5.9%       30.5%        63.6%

  United States 17.9 1% 19% 80%
  China 11 9% 41% 50%
  Japan 4.7 1% 28% 71%
  Germany 3.5 1% 28% 71%
  United Kingdom 2.7 1% 21% 78%
  France 2.5 2% 18% 80%
  India 2.25 14% 27% 59%

 

Nominal GDP sector composition, 2016 Oh percentage and in dollars)

 

On the basis of the above table, we can conclude the following:

  • Comparison of US and Indian GDP: In 2016, India’s GDP was $2.25 trillion and the US GDP was $17.9 trillion. Thus, US GDP was approximately eight times that of India’s GDP.
  • Relative contribution of various sectors: The relative contributions of the primary, secondary, and tertiary sectors in India’s GDP are 14%, 27%, and 59%, respectively. On the other hand, the relative contributions of the primary, secondary, and tertiary sectors in the US GDP are 1%, 19%, and 80%, respectively. The relative contribution of the secondary and tertiary sectors increases as the economy continues to transit from a developing to a developed economy. This is because when the level of development increases, the consumption of agricultural commodities can increase only to an extent. However, people consume more and more manufactured goods and services.  Classification Of Indian Economy
  • Comparison of actual size of particular sector: The US GDP is eight times compared to India’s GDP. The relative contributions of the services sector in the United States and India are 80% and 59%, respectively. Thus, the ratio of the actual size of the services sector in India and the United States is 59 and 640 (80 x 8).
  • Workforce distribution in various sectors of economy: Distribution of workers by different industrial categories (in India).

 

Industrial Category

 

Percentage (%)

 

Total workers 100.0
Agriculture and allied activities 56
Mining and quarrying 1
Primary sector (Agriculture and allied activities and mining and quarrying) 57 (subtotal)
Manufacturing 14
Electricity, gas, and water supply 03
Construction 3.5
Secondary sector (manufacturing, electricity, gas and water supply, and construction) 18 (subtotal) 18 (subtotal)
Wholesale, retail trade and repair work, hotels and restaurants 10.0
Transport, storage, and communications 4.0
Financial intermediation, business consultancy 2.0
Other services 9.0
Services sector 25 (subtotal)

 

  • As India will continue to grow, more and more workforce will shift from primary activities to secondary and tertiary activities. For instance, typical labour participation in a developed country is 10% in the primary sector, 20% in the secondary sector, and 70% in the tertiary sector. More machinery is deployed in the primary sector, which reduces the number of workers needed. As a result, the demand for machinery production in the secondary sector increases. Further, the primary and secondary sectors are increasingly dominated by automation and the demand for workforce reduces in these sectors. It is replaced by the growing demands of the tertiary sector.                    Classification Of Indian Economy
  • Per capita income and labour productivity: In India, the relative contributions of the primary, secondary, and tertiary sectors in the GDP are 14%, 27%, and 59%, respectively. On the other hand, the percentages of workforce employed in these sectors are 57%, 18%, and 25%, respectively. Thus, it can be concluded that workforce productivity is highest in the tertiary sector and lowest in the primary sector. This is due to the fact that delivery of services demands higher skills. More population shifting to secondary and tertiary activities signifies rise in the overall labour productivity and consequently rise in the per capita income. The populations of the United States and India are 32 crore and 132 crore (in 2016), respectively. On the other hand, the US GDP is eight times the size of India’s GDP. Thus, the per capita income in the United States is 33 (132/32 x 8) times that of India.

USUAL TRANSITION IN ECONOMY | Classification Of Indian Economy

  • The relative shares of various sectors in the economy undergo transition with the level of development in the economy. In the least developed countries, the relative share of the primary sector is high in comparison to the shares of the secondary and tertiary sectors (there are no fixed percentages).
  • In the developing countries, the share of the secondary sector is the highest. The relative shares of the primary and tertiary sectors are lower than that of the secondary sector. In the developed economy, the share of the tertiary sector is the highest. The tertiary sector even exceeds the total contribution made by the primary and secondary sectors.

Least Developed Countries, Developing Countries, and Developed Countries

  • The least developed countries (LDCs) are countries that, according to the United Nations, exhibit the lowest indicators of socioeconomic development, with the lowest human development index (HDI) ratings of all the countries in the world. The concept of LDCs originated in the late 1960s. A country is classified among the LDCs if it meets three criteria:
  • Poverty—an adjustable criterion based on the per capita averaged over three years. As of 2015, a country must have GNI per capita less than $1035 to be included on the list, and over $1242 to graduate from it.
  • Human resource weakness (based on the indicators of nutrition, health, education, and adult literacy).
  • Economic vulnerability (based on the instability of agricultural production, instability of exports of goods and services, economic importance of non-traditional activities, merchandise export concentration, and the percentage of population displaced by natural disasters).                Classification Of Indian Economy
  • The LDC criteria are reviewed every 3 years by the Committee for Development Policy (CDP) of the UN Economic and Social Council (ECOSOC). Countries may “graduate” out of the LDC classification when indicators exceed these criteria.
  • A developing country, also called a less developed country or an underdeveloped country, is a nation or a sovereign state with a less developed industrial base and a low HDI relative to other countries. There are no universally agreed criteria that make a country developing or developed, although there are general reference points such as a nation’s GDP per capita compared to other nations.
  • Less developed country is a general term and should not be confused with the specific term, least developed country. The definition of the least developed country is given by the United Nations.
  • A developed country, industrialized country, or “more economically developed country” (MEDC), is a sovereign state that has a highly developed economy and advanced technological infrastructure relative to other less industrialized nations. Most commonly, the criteria for evaluating the degree of economic development are GDP, per capita income, level of industrialization, amount of widespread infrastructure, and general standard of living. Criteria are to be applied, and which countries can be classified as being developed are subjects of debate.
  • Developed countries have post-industrial economies, meaning the service sector provides more wealth than the industrial sector.

PECULIAR CASE OF INDIA’S GROWTH STORY: SERVICES-LED GROWTH | Classification Of Indian Economy

  • India’s economic growth is mainly on account of growth in the services sector. It has bypassed the stage of growth in the secondary sector. India has witnessed high growth in the services sector due to the following reasons:
    • Low cost of workers
    • Availability of skilled personnel
    • People who can speak English and, thus, provide services abroad
    • Information technology facilitating delivery of services from India to anywhere across the world
  • On the other hand, India has not witnessed much growth in the secondary sector due to the following reasons:
    • Late entry of the private sector in the economy due to delayed liberalization
    • Competition from Chinese goods, which are available at cheap prices and are available in wide range
    • Poor quality of infrastructure, which enhances the cost of doing business and hampers the pace of business operations. For instance, electricity produced by diesel can cost twice as much as the energy produced from coal or hydropower based systems. High energy costs combined with other infrastructure deficits, such as rail and road problems, have lowered the productivity rates of manufacturing industries in India.
    • Excessive rules and regulations in India (or red tape). For example, securing numerous clearances before setting up a business enhances the cost of functioning of business. The high cost of functioning makes survival difficult for the business in the highly competitive environment. Difficulty in starting a business dissuades people from entering into business activity.
    • Consequences of Low Growth in Secondary Sector
    • The secondary sector produces machinery for use in primary and tertiary activities. Slow growth in the secondary sector hampers mechanization and automation in the primary and tertiary sectors as well.

ORGANIZED AND UNORGANIZED SECTORS | Classification Of Indian Economy

Sectors of economy are majorly divided into three categories: primary, secondary, and tertiary. Based on the employment conditions, these are further classified as organized and unorganized sectors.

Organized sector: The sector that is registered with the government is called an organized sector. In this sector, the employment terms are fixed and regular. A number of acts apply to enterprises covered under the organized sector.

Unorganized sector: The sector that is not registered with the government and whose terms of employment are not fixed and regular is considered an unorganized sector. In this sector, no government rules and regulations are followed.

 

     Basis                    Organized Sector                                   Unorganized Sector
Meaning The sector in which employment terms are fixed and employees have assured work The sector that comprises small-scale enterprises or units which are not registered with the government
Governed by Various acts such as Factories Act, Bonus Act, PF Act, Minimum Wages Act, etc. Not governed by any act
Remuneration Regular monthly salary Usually daily wages

 

INDIAN CONTEXT | Classification Of Indian Economy

  • Nearly 93% of the Indian workforce is in the unorganized sector and only 7% is in the organized sector. Both the unorganized and organized sectors contribute nearly 50% to the GDP.
  • Almost all the workforce in the primary sector is part of the unorganized sector. The unorganized sector is not covered under various laws and thus lacks bare minimum social security benefits such as pension, insurance, etc.

Care Economy: The Human Side of Economy

  • The care economy is that part of human activity, both material and social, which is concerned with the process of caring for the present and future human population, including the domestic provisioning of food, clothing, and shelter, regardless of whether it is of paid or unpaid nature.

What Is the Need of Recognizing “Care Economy”?

  • There is a need to shift economic measurements, policies, and practices from the current focus on GDP to a humane and prosperous economy that recognizes the enormous return on investment in the most important, yet undervalued, human work: the work of caring for and educating people.

Investing in Care Grows Our Real Wealth

  • We need new economic measures and policies that recognize the enormous financial return from investing in caring for people. Investing in our human infrastructure reduces the back-end costs of crime, illness, and lost potential—the enormous yet avoidable costs of an uncaring economy.

Empowering Women | Classification Of Indian Economy

  • Because women do most of the work of care for little or no pay, the Caring Economy Campaign is essential to lift the status of women.

 

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Indian Economy

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