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Latest Economics NCERT Notes, Solutions and Extra Q & A (Class 9th to 12th)
9th 10th 11th 12th

Class 10th Chapters
1. Development 2. Sectors Of The Indian Economy 3. Money And Credit
4. Globalisation And The Indian Economy 5. Consumer Right

Chapter 2 Sectors Of The Indian Economy

Understanding an economy involves studying its various components or sectors. Economic activities can be classified based on several criteria. This chapter focuses on three main ways of classifying the Indian economy:

  1. Primary, Secondary, and Tertiary (based on the nature of the activity).
  2. Organised and Unorganised (based on employment conditions).
  3. Public and Private (based on ownership of assets).

The chapter highlights the changing roles of these sectors over time, particularly the growth of the service sector, and discusses key concepts like Gross Domestic Product (GDP) and Employment. It also examines issues like underemployment and the need to protect workers in the unorganised sector, relating these concepts to everyday observations and experiences.

Sectors Of Economic Activities

People engage in various economic activities around us daily, producing goods and services. To understand these activities better, we group them into categories called sectors, based on certain criteria.

Primary Sector

This sector includes activities that involve directly using or exploiting natural resources. For example, cotton cultivation depends on natural factors like rainfall and sunlight, yielding cotton as a natural product. Dairy farming relies on biological processes of animals and natural resources like fodder, producing milk. Mining extracts minerals and ores, which are natural products.

It's called the primary sector because it forms the foundation or base for all other goods and services that are subsequently produced. Since many of the products in this sector are derived from agriculture, dairy, fishing, and forestry, it is also commonly referred to as the agriculture and related sector.

Secondary Sector

The secondary sector builds upon the primary sector. It covers activities where natural products from the primary sector are transformed into other forms through manufacturing processes. Unlike the primary sector, the product is not directly obtained from nature but is created through human effort and industry.

Manufacturing can take place in various settings, such as factories, workshops, or even at home. Examples include spinning yarn and weaving cloth from cotton fiber, making sugar or jaggery from sugarcane, or creating bricks from earth to construct buildings. Because this sector became increasingly associated with different types of industries, it is also known as the industrial sector.

Tertiary Sector

The tertiary sector is distinct from the primary and secondary sectors. Activities in this sector do not produce tangible goods directly. Instead, they provide services that act as an aid or support for the production and distribution processes in the primary and secondary sectors.

For instance, transporting goods from farms or factories to markets requires services like trucks or trains (transport). Selling goods involves retail and wholesale shops (trade). Storing products requires godowns (storage). Communication (telephone, letters) and financial services (banking) are also needed to facilitate production and trade.

Due to the nature of these activities generating services rather than goods, the tertiary sector is also called the service sector.

Beyond aiding production, the service sector also includes essential services that are necessary for society but may not directly contribute to producing goods. Examples include teachers, doctors, administrative staff, accountants, lawyers, and providers of personal services like washermen, barbers, and cobblers. In recent times, new services driven by information technology, such as internet cafes, ATM booths, call centers, and software development companies, have become increasingly important parts of the tertiary sector.

Diagram showing Primary, Secondary, and Tertiary sectors and their relationship

Interdependence Of Sectors

Although classified into three distinct categories, the primary, secondary, and tertiary sectors are highly interdependent. The functioning of one sector often relies on the products or services provided by the others.

Examples illustrating interdependence:

These examples demonstrate how disruptions or changes in one sector can have significant ripple effects on the others, highlighting their interconnectedness in the overall economy.

Comparing The Three Sectors

After classifying economic activities, the next step is to compare the sectors in terms of their contribution to the economy. This involves quantifying the total production in each sector and understanding the number of people employed within them.

Counting Goods And Services

Counting every single good and service produced across thousands of different types is practically impossible and would not yield meaningful comparative results (e.g., simply adding the number of cars, computers, and nails doesn't make sense economically).

Final Goods And Intermediate Goods

Economists address the challenge of comparison by using the value of goods and services instead of counting their numbers. For instance, instead of counting kilograms of wheat, its value is calculated by multiplying quantity by price (e.g., 10,000 kg at $\textsf{₹}\,20/\text{kg} = \textsf{₹}\,2,00,000$). The values of goods and services in each sector are calculated and summed up.

A crucial point is to only count the value of final goods and services – those that directly reach the consumers. Goods used up in the production process of final goods are called intermediate goods. For example, in making biscuits:

Only the value of the final good (biscuits) is counted because the value of all intermediate goods used in its creation is already included in the final price. Counting intermediate goods separately would lead to double-counting the value of the same product multiple times in the production chain.

Gross Domestic Product (GDP)

The sum of the values of all final goods and services produced in each of the three sectors (primary, secondary, and tertiary) during a specific year within a country provides the total production for that sector for that year. Adding up the total production of all three sectors gives 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. It is a key indicator of the size and health of an economy.

In India, the complex task of measuring GDP is undertaken by a central government ministry, which collects data from government departments across all states and union territories to estimate the total volume and value of goods and services produced.


Historical Change In Sectors

Observing the economic history of many countries that are now developed reveals a general pattern of shifts in the importance of the three sectors over time.

Initial Stages (Primary Dominance)

In the early phases of development, the primary sector was typically the most important sector, both in terms of total production and employment. Economic activities primarily involved extracting or producing natural products (agriculture, forestry, etc.).

As agricultural methods improved and farming became more productive, it generated a surplus of food. This allowed a larger portion of the population to engage in other activities beyond farming, leading to an increase in craftspersons, traders, and other service providers (transporters, administrators, army). However, the majority of goods produced were still from the primary sector, and most people remained employed within it.

Shift To Secondary Sector

Over a long period, often spanning more than a hundred years, the manufacturing sector began to grow significantly. The introduction of new methods of production led to the establishment and expansion of factories. People who had previously worked in agriculture started migrating to factories in large numbers, often driven by economic necessity or changes in land availability.

Factories produced goods at cheaper rates, increasing their use by the population. Gradually, the secondary sector became the most important sector in terms of total production and employment. This marked a significant shift in the economic structure.

Shift To Tertiary Sector In Developed Countries

In the developed countries, a further shift has been observed over the past century. There has been a movement away from the secondary sector towards the tertiary sector (service sector). The service sector has grown to become the most important in terms of total production, and the majority of the working population is now employed in providing services.

This progression – from primary to secondary, and then to tertiary dominance – is considered a general pattern seen in the historical development of many developed economies.


Primary, Secondary And Tertiary Sectors In India

Let's examine whether India has followed the historical pattern of sectoral shift observed in developed countries by comparing the performance of the three sectors in two different years: 1973-74 and 2013-14. This comparison helps understand the changes in total production and employment distribution.

Production Growth Over Forty Years

Comparing the GDP contribution of the three sectors in 1973-74 and 2013-14 shows significant growth in total production over this forty-year period. While all three sectors have seen an increase in production, the growth in the tertiary sector has been the most substantial.

Graph showing GDP contribution of Primary, Secondary, and Tertiary sectors in India for 1973-74 and 2013-14

Rising Importance Of The Tertiary Sector In Production

As a direct result of the highest growth among sectors, the tertiary sector emerged as the largest producing sector in India by 2013-14, surpassing the primary sector, which was the largest in 1973-74. This indicates a significant shift in the contribution of sectors to India's GDP, aligning with the pattern seen in developed countries in terms of production share.

Reasons For Rising Importance Of Tertiary Sector

Several factors explain the increasing importance of the tertiary (service) sector in India:

  1. Requirement for Basic Services: Every country requires essential services like hospitals, schools, post offices, police stations, courts, administrative offices, defense, transport, banks, and insurance. These are considered basic services, and in a developing country like India, the government must take responsibility for their provision.
  2. Development of Primary and Secondary Sectors: As agriculture and industry develop, they create a greater demand for supporting services such as transport, trade, and storage. Growth in the primary and secondary sectors indirectly fuels the growth of these related services.
  3. Rising Income Levels: As incomes increase, certain segments of the population can afford and begin demanding more services like dining out, tourism, shopping, private healthcare, private education, and professional training. This trend is particularly noticeable in cities, especially large ones.
  4. Importance of New Services: Over the last decade or two, new services based on information and communication technology (ICT) have become vital. Examples include internet services, ATM facilities, call centers, and software companies. The production and demand for these ICT-based services have grown rapidly.

However, it's important to note that not all parts of the service sector are growing equally well. While services employing highly skilled workers are expanding, a vast number of workers are in low-paid services (small shops, repairs, transport) because they lack better opportunities. Only a segment of the service sector shows significant growth in importance.

Employment Distribution

A striking fact about India's economic structure is the **discrepancy between the share of sectors in GDP and their share in employment**. While the tertiary sector's contribution to GDP has surged, the **primary sector continues to be the largest employer**.

Graph showing the share of sectors in India's GDP (%) for 1973-74 and 2013-14
Graph showing the share of sectors in India's Employment (%) for 1977-78 and 2017-18

Graph 3 illustrates the share of employment in the three sectors in 1977-78 and 2017-18. The primary sector employed the vast majority in the earlier period and remains the largest employer even after forty years, despite its lower share in GDP (around one-sixth).

Mismatch Between Share In Gdp And Employment

The expected shift of employment away from the primary sector, observed historically in developed countries when secondary and tertiary sectors grew, has not occurred to the same extent in India. The reason is that the secondary and tertiary sectors, despite significant increases in production (industrial output up >9 times, service sector production up 14 times), have not created enough jobs to absorb the surplus labour from agriculture. Industrial employment grew only about three times, and service sector employment about five times over the same period.

This results in a situation where more than half of the country's workers are concentrated in the primary sector (mainly agriculture), contributing only a small fraction of the total GDP, while the secondary and tertiary sectors produce the bulk of the output with less than half the workforce.

Underemployment Or Disguised Unemployment

The situation where the primary sector employs a disproportionately large number of people relative to its production contribution indicates that many workers in agriculture are underemployed. This means they are working, but their labour is not being fully utilised, or they are working less than their potential. Removing some of these workers would not necessarily reduce the overall agricultural production.

This type of underemployment is often hidden and less obvious than someone who is openly unemployed and actively looking for work. Hence, it is also called disguised unemployment.

Laxmi's example of a two-hectare unirrigated plot worked by all five family members illustrates this. While everyone seems busy, the work could likely be done by fewer people; the labour effort is divided, meaning no one is fully employed to their potential. If two members of her family were to take up other work (on a landlord's farm or in a factory), the production on their own plot would likely remain the same, but the family's income would increase.

Disguised unemployment is not limited to agriculture. It can also be seen in urban areas in the service sector, where thousands of casual workers (painters, plumbers, street vendors, etc.) struggle to find work every day or earn very little despite spending long hours. They are in these jobs due to a lack of better opportunities.

How To Create More Employment?

Addressing the problem of underemployment and unemployment, particularly the significant disguised unemployment in agriculture, requires deliberate efforts to create more jobs across different sectors. Some potential measures include:

Improving Irrigation

Providing irrigation facilities can significantly increase agricultural employment. For instance, government spending or bank loans for constructing wells or dams/canals allow farmers to grow a second crop (like wheat in the rabi season) on unirrigated land. This requires more labour, directly employing more people within the farming sector and reducing underemployment.

Improving Transport And Storage

Increased production requires facilities to transport and store the surplus. Government investment in better rural roads, transportation means (like mini-trucks), and storage facilities (godowns) helps farmers sell their produce more effectively. This activity creates productive employment not only for farmers but also for people in transport and trade services.

Providing Cheap Credit

Small and poor farmers often lack the funds to buy necessary inputs like seeds, fertilizers, and equipment, forcing them to borrow at high interest rates from moneylenders. Providing access to affordable credit through local banks can enable farmers to buy inputs on time, improve farming practices, and potentially employ more labour on their farms.

Promoting Industries And Services In Semi-Rural Areas

Identifying and promoting specific industries and services in semi-rural regions can create jobs closer to where many underemployed people live. Examples include setting up dal mills to process pulse crops, cold storage facilities for perishable produce like potatoes and onions, honey collection centers, or small industries processing vegetables and agricultural products for outside markets. This creates employment opportunities outside major urban centers.

Investing In Education And Health Sector

Significant employment potential exists in the education and health sectors, while also addressing important development aspects (as discussed in Chapter 1). With a large young population, many of whom are not in school, investing in more schools, buildings, teachers, and staff can create millions of jobs in education. Similarly, improving the health situation requires more doctors, nurses, and health workers, generating employment, particularly in rural areas.

Implementing Right To Work (MGNREGA)

Recognizing the immediate need for quick measures, the Indian government implemented the Mahatma Gandhi National Rural Employment Guarantee Act 2005 (MGNREGA 2005). This law guarantees 100 days of wage employment in a financial year to rural households whose adult members volunteer to do unskilled manual work. If the government cannot provide this employment, it must provide unemployment allowances. The Act prioritizes work that will enhance land production, providing a direct avenue for employment and income in rural areas.

Division Of Sectors As Organised And Unorganised

Another way to classify economic activities and understand employment conditions is by distinguishing between the organised and unorganised sectors. This classification looks at the terms of employment and whether rules and regulations are followed.

Organised Sector (Kanta's Example)

The organised sector includes enterprises or workplaces where the terms of employment are regular and people have assured work. These entities are registered by the government and are legally bound to follow rules and regulations stipulated in various laws like the Factories Act, Minimum Wages Act, Payment of Gratuity Act, and Shops and Establishments Act. It's called 'organised' due to its formal processes.

Workers in this sector enjoy several benefits:

Workers receive a formal appointment letter detailing terms and conditions.

Unorganised Sector (Kamal's Example)

In contrast, the unorganised sector consists of small and scattered units that are largely outside the control of the government. Although rules and regulations exist, they are typically not followed in practice. Jobs in this sector are generally low-paid and often not regular or assured.

Working conditions lack many benefits of the organised sector:

This sector includes a large number of self-employed individuals doing small jobs (street vendors, repair work) and those who hire labour only when needed (farmers). Workers do not receive formal employment letters.

Differences In Working Conditions

The examples of Kanta (organised) and Kamal (unorganised) highlight the stark differences in their working conditions:

How To Protect Workers In The Unorganised Sector?

Despite the desirable conditions in the organised sector, job opportunities there have been expanding very slowly in India. Furthermore, many organised sector businesses operate informally to avoid taxes and labour laws, effectively becoming part of the unorganised sector.

Vulnerability Of Unorganised Sector Workers

These factors compel a large number of workers to take jobs in the unorganised sector, which are often low-paying, insecure, and involve exploitation. Workers are not guaranteed a fair wage, earnings are low and irregular, and there are no benefits. Many workers who lose jobs in the organised sector are also forced into this vulnerable sector.

Therefore, alongside creating more jobs, there is a critical need to protect and support workers in the unorganised sector.

Vulnerable Groups In Rural Areas

In rural India, the unorganised sector largely comprises:

These groups need support in areas such as timely access to seeds, agricultural inputs, credit, storage facilities, and marketing channels to improve their livelihoods and reduce vulnerability.

Vulnerable Groups In Urban Areas

In urban areas, the unorganised sector mainly includes:

Small-scale industries require government support for procuring raw materials and marketing their products. Casual workers in both urban and rural settings are particularly vulnerable and need protection.

Need For Protection And Support

A significant majority of workers from Scheduled Castes, Scheduled Tribes, and Backward Communities are employed in the unorganised sector. Besides facing irregular, low-paid work and lack of security/benefits, they also endure social discrimination. Providing protection and support to unorganised sector workers is thus essential not only for their economic well-being but also for overall social development and achieving equality.

Sectors In Terms Of Ownership: Public And Private Sectors

Another key way to classify economic activities is based on who owns the assets and is responsible for providing services.

Public Sector

In the public sector, the government owns most of the assets and is responsible for providing the services. Examples include Indian Railways and the Post Office. The primary purpose of the public sector is not just to earn profits but to serve the public good. Governments fund these services through taxes and other revenue sources.

Private Sector

In the private sector, the ownership of assets and the delivery of services are in the hands of private individuals or companies. Examples include companies like Tata Iron and Steel Company (TISCO) or Reliance Industries (RIL). Activities in the private sector are primarily driven by the motive to earn profits. Consumers pay money directly to these private entities for the services or goods provided.

Purpose Of Public Sector

The public sector plays a vital role because there are certain essential goods and services needed by society as a whole that the private sector might not provide at a reasonable cost or in sufficient quantity. These often involve large-scale spending beyond the capacity of private companies (e.g., constructing roads, bridges, railways, power plants, irrigation dams) or where collecting payment from numerous users is difficult. If private companies did provide these, they might charge high rates, making them inaccessible to many. Therefore, governments undertake such significant investments to ensure these essential facilities are available for everyone.

Supporting Private Sector Activities

The government also needs to support some activities that the private sector might not continue on its own without encouragement. For instance, providing electricity at the actual generation cost might make production too expensive for many industries, especially small ones, potentially leading to closures. The government intervenes by supplying electricity at affordable rates, bearing part of the cost to support industries and employment.

Similarly, the government purchases food grains like wheat and rice from farmers at a fair price, stores them, and sells them to consumers at a lower price through ration shops (Public Distribution System - PDS). The government subsidizes part of the cost, supporting both farmers (fair price) and consumers (affordable food).

Government's Primary Responsibility

Many activities are considered the fundamental responsibility of the government and necessitate public spending. Providing health and education facilities for all citizens is a prime example, crucial in a country with a large illiterate population and significant child malnutrition. Running quality schools, especially elementary ones, is a governmental duty. Governments must also address human development needs like safe drinking water, housing for the poor, and food/nutrition security. Increased government spending is particularly required in the poorest and most neglected regions to ensure equitable development.

Summing Up

This chapter provided different frameworks for classifying economic activities to gain a better understanding of the Indian economy.

Classification By Nature Of Activity

Economic activities can be classified into the primary, secondary, and tertiary sectors based on the nature of the activity (direct use of natural resources, manufacturing, or providing services). Data for India shows a significant shift in production contribution towards the tertiary sector, although the primary sector continues to employ the largest share of the workforce. This mismatch highlights issues like underemployment.

Classification By Employment Conditions

Classifying activities into the organised and unorganised sectors based on employment conditions (regularity, adherence to rules, benefits) reveals that the majority of workers are in the unorganised sector. These workers often face exploitation, lack security and benefits, emphasizing the need for protection and support, particularly for vulnerable groups.

Classification By Ownership

Finally, distinguishing between the public and private sectors based on asset ownership and service delivery highlights the different objectives driving economic activities. While the private sector is driven by profit, the public sector focuses on providing essential goods and services for the collective well-being of society, often undertaking activities that are beyond the capacity or reasonable cost provision of the private sector and addressing basic human development needs.