Chapter IVStructural Change with Special Reference to

Tertiary Sector in India

The structural change is defined as a process of combining

economic growth with changing share of different sectors in gross

domestic product (GDP) and labour force. Historically, the most common

pattern of structural change that has been observed in developed countries

has followed a sequence of shift from primary to secondary and then to

tertiary sector. In this pattern, an underdeveloped country is characterized

by a predominant share of primary sector, while with economic

development the share of secondary sector increases and that of primary

sector declines and subsequently after reaching a reasonably high level of

development, the tertiary sector attains importance by becoming the

dominant sector of the economy. These structural changes have been

observed both in the relative share of gross domestic product and

workforce by many economists (Fisher, 1939; Clark, 1940; Kuznets,

1966, 1971; Chenery and Syrquin, 1975). In this context the following

chapter, on structural change with special reference to India, has been

divided into two Sections. First section deals with the brief analysis of

global experience of tertiary sector development in some selected

countries of the world and the next section jots down the detailed analysis

of structural change in the Indian context.

ITertiary Sector Growth: The Global Experience

The global experience of economic development of developed

countries of today has followed a common pattern. These patterns are

very well documented by Kuznets (1966) and others and are very well

79

known to economists. In these countries the share of primary sector has

registered a steady decline in total output, whereas that of secondary

sector has shown an increase for a considerable long period and after that

it has declined. However, the share of tertiary sector has steadily

increased throughout, but the rate of increase seems to have accelerated in

the latter half of the twentieth century. This is the period during which

industry has seen a decline in its share and, therefore, is often described

as a period of ‘deindustrialization’ (Rowthorn and Wells, 1987) in

developed countries. This period is characterized by the emerging

dominance of tertiary sector in the economies of developed countries and

is also seen as signaling the dawn of a ‘post-industrial society’ (Clark,

1984).

The timing of different phases of structural changes and the speed

of such changes have, of course, been different among different countries.

According to Kuznet’s assessment the pre-modern era ended at different

points of time during the nineteenth century in different countries (i.e.,

before 1800 in United Kingdom, 1835 in France, 1861 in Italy, 1870 in

United States of America and 1878 in Japan etc.) primary sector

accounted for a half to two-thirds of the total output. It seems to have

taken about 75 to 100 years for this share to decline to about one-fourth in

the case of most European countries. Although the similar shift was

achieved more swiftly in North America and Japan which were relatively

latecomers to the path of modern economic development. In spite of

differences in timing of entry into the era of modern economic

development and its speed of transformation, the share of primary sector

had declined to less than 15 percent in most of these countries by the

middle of the twentieth century. Further, it reduced to less than 5 percent

in all of these countries by the end of the twentieth century.

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In most of the developed countries of today the share of secondary

sector was around 25 percent in the beginning of modern development. It

grew steadily to reach the peak of about one-half by 1950’s in all of these

countries irrespective of the period when these entered the

industrialization phase. But after that all the developed countries have

seen a decline in the share of secondary sector in their total output. By

and large, the changes in secondary sector have been observed to be

hump-shaped (Kuznets, 1966 and Echevarria, 1997). It is interesting to

note that by the beginning of twenty first century, in most of these

countries, the secondary sector has the same share in their output as it was

during the beginning of their journey to modern economic development.

Thus, in the year 2006 the share of secondary sector in national output of

United Kingdom was 26 percent as compared to 23 percent in 1801, in

France 21 percent as compared to 25 percent in 1841, in Germany 30

percent as compared to 24 percent in 1841, in United States of America

22 percent as compared to 20 percent in 1841 and in Italy 27 percent as

compared to 22 percent in 1901.

The tertiary sector has experienced a secular rise in its share right

through the period of modern economic growth in all of these countries

except for an initial decline in few countries like United Kingdom, France

and Germany which were the early industrializers. In United Kingdom

the share crossed 50 percent mark by 1901 to saw a decline till about

mid-1950’s and then again crossed 50 percent by 1960 when most other

countries like France, Germany, Italy and Japan has crossed this mark for

the first time. The United States of America had hit a 50 percent mark for

tertiary sector in its GDP even earlier then 1960. Thus, it is quite obvious

from these historical patterns as documented in economic literature that

the most common global pattern of structural change that have been

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observed in developed countries of today has followed a sequence of shift

from primary to secondary and then to tertiary sector.

Table 4.1 shows the percentage sectoral shares of some selected

developed countries in the year 2006. What is interesting to observe is

that by the end of the twentieth century most of the developed countries

showed a remarkably similar production structure of their economies.

Thus, primary sector contributed less than 5 percent in GDP, secondary

sector 20 percent to 30 percent and services around 70 percent in all of

them.

Table 4.1: Percentage sectoral shares in GDP of selected developed countries in the year 2006

Country SectorPrimary Secondary Tertiary

United Kingdom 1 26 73United States 1 22 77France 2 21 77Japan 2 30 68Germany 1 30 69Italy 2 27 71Australia 3 27 70

Source: World Development Report, 2008.

Table 4.2 shows the percentage sectoral shares in employment of

these selected developed countries. Table underscores the fact that by the

end of twentieth century, most of the developed countries showed a

similar employment structure of their economies, wherein primary sector

contributed less than 5 percent, secondary sector 20 percent to 30 percent

and services around 70 percent in all of them. Thus, the share of each

sector in employment is moving in line with the GDP share of that sector.

The most striking feature is that today the employment structure of most

developed countries is strikingly similar to their production structure,

thus, reflecting a high degree of inter-sectoral equality in their

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productivity and income levels.

Table 4.2: Percentage sectoral shares in employment of selected developed countries in the year 2006

Country SectorPrimary Secondary Tertiary

United Kingdom 1 21 78United States 1 20 79France 3 24 73Japan 5 27 68Germany 2 29 69Italy 4 28 68Australia 4 20 76

Source: Calculated from World Development Indicators, 2008.

However, in their path to economic development the experience

of some developing countries of Asia has been somewhat different from

the developed nations. In fact, since 1960 there has been a relatively fast

and continuous change in their sectoral composition. Table 4.3 depicts the

changing sectoral shares in GDP of some selected developing countries of

Asia for the years 1960 and 2006. In consonance with the historical

experience of developed countries the share of primary sector has

continuously declined in all of these developing Asian countries,

including India. The largest decline in percentage share of primary sector

has been observed in Republic of Korea from 37 percent in 1960 to 3

percent in 2006. In China, Thailand and Malaysia the secondary sector

remains the most important sector. During the same period, the

percentage share of secondary sector in gross domestic product increased

in Thailand from 19 percent to 46 percent and in Malaysia from 18

percent to 52 percent. However, in China it has shown a slight decline

from 49 percent to 47 percent.

Contrary to the experience of developed countries, in Indonesia,

Philippines, Republic of Korea, Pakistan and India the tertiary sector has

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emerged as a dominant sector by bypassing the secondary sector. During

the year 1960 and 2006 the share of tertiary sector in gross domestic

product has increased in Indonesia from 25 percent to 46 percent, in

Philippines from 46 percent to 53 percent, in Republic of Korea from 43

percent to 57 percent, in Pakistan from 38 percent to 53 percent and in

India from 29 percent to 54 percent respectively. Thus, India has

registered the fastest growth in tertiary sector as compared to all other

service led countries of Asia.

Table 4.3: Percentage sectoral shares in GDP of selected developing Asian countries

Country SectorPrimary Secondary Tertiary

1960 2006 1960 2006 1960 2006ChinaIndonesiaThailandPhilippinesMalaysiaRepublic of KoreaPakistanIndia

3050402636374655

1212101408032022

4925192818201616

4742463352402724

2125414646433829

4146445340575354

Source: World Development Report, 2008

The Table 4.4 depicts the changing sectoral shares in employment

of these selected developing countries of Asia for the year 1960 and

2006. In consonance with the historical experience of developed countries

the share of primary sector in employment has been continuously

declining in all of these countries including India. However, in these

countries this corresponding shift in labour force from primary sector to

other sectors has been relatively much slower as compared to their GDP

shares.

Table 4.4: Percentage sectoral shares in employment of selected developing Asian countries

Country SectorPrimary Secondary Tertiary

1960 2006 1960 2006 1960 2006

84

ChinaIndonesiaThailandPhilippinesMalaysiaRepublic of KoreaPakistanIndia

6975846163666174

4342423514085353

1808041512091811

2518211431251819

1317122425252115

3240375155672928

Source: Calculated from World Development Indicators, 2008.

The process of economic development in an economy results in

distinct structural changes. As a country progresses and the gross

domestic product (GDP) basket enlarges, a shift in economic activity

occurs away from agriculture towards tertiary and manufacturing sectors,

owing to higher income elasticity of the latter two sectors than that of

former sector (Fisher, 1939 and Clark, 1940). The process, in turn, leads

to structural shifts, and consequent diminishing significance of primary

activities and growing dominance of secondary and tertiary activities.

This process brings significant changes in the production process,

consumption pattern and various other social indicators. As per the

standard economic literature on the subject, service sector experiences an

accelerated growth only after a certain level of development has taken

place in agriculture and industry. Experiences of the economies over-

time, in this regard, have been varied. For instance, in most of the

developed economies, economic development followed a sequence

wherein sectors viz., agriculture, industry and tertiary sector developed in

that order. On the contrary, the experience of some of countries such as

India bears out that subsequent to the development of the primary sector,

tertiary sector developed without a successful transition to an

industrialized economy.

Thus, by the end of the twentieth century most of the developed

countries have showed a remarkably similar structure of their economies.

In most of the developed countries of the world, the emerging pattern is

85

indicative of the fact that the primary sector contributes less than 5

percent in GDP and employment, secondary sector from 20 percent to 30

percent and services around 70 percent. Thus, the share of each sector in

employment is moving in consonance with its GDP share. Most striking

feature is that today the employment structure of most developed

countries is strikingly similar to their production structure; thus, reflecting

a high degree of inter-sectoral equality in their production and income

levels. On the other hand, in developing countries, primary sector is

shrinking over time and at the cost of this shrinkage, the tertiary sector is

emerging as a dominant sector, followed by secondary sector, in terms of

share in GDP. It is interesting to note that in some of the developing

countries like India, leaving the standard growth pattern of primary,

secondary and tertiary; the tertiary sector has grown by bypassing the

secondary sector. Moreover, this disproportionate growth of GDP share

in tertiary sector in the developing countries, including India, has not

been matched by similar shifts in their labour force. Such a lop-sided

growth of tertiary sector needs a careful investigation of underlying

structure and dynamics of the system.

IITertiary Sector Growth: The Indian Experience

This section analyzes the changing pattern of structural shift in

India with special reference to tertiary sector. As already said, the Indian

economy has observed a growth pattern in which the share of tertiary

sector in GDP has moved far ahead of its share in primary as well as

secondary sectors without proportionate change in labour force. This is at

variance with the historical pattern of development as observed in

developed countries. Apart from India, this type of disproportionate

growth of the tertiary sector has been observed by some other developing

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countries also. For analysis of structural change, the sector level data

from 'National Accounts Statistics' (CSO) has been used.

The sectoral shares in Gross Domestic Product (GDP) are given in

Table 4.5. The table is indicative of the fact that in 1950's, at 1999-2000

prices, the primary sector was the dominant sector of the economy and

accounted for the largest share of 56.84 percent in GDP. But after that its

share in GDP has been continuously declining over time: to 52.69 percent

in 1960-61; to 45.95 percent in 1970-71; to 39.93 percent in 1980-81; to

34.04 percent in 1990-91; to 26.17 percent in 2000-01; and to 20.55

percent in 2006-07. Thus, over a span of about 57 years, the share of

agriculture in particular and primary sector in general has been reduced to

less than half. The decline in share of primary sector with every increase

in GDP is an indication of healthy economic development. It is also in

line with the pattern of historical experience of developed countries.

The secondary sector has not shown a much change. Rather it has

grown at a slow pace. The share of secondary sector has shown a

marginal change from 13.62 percent in 1950-51 to 17 percent in 1960-61,

to 20.50 percent in 1970-71, to 22.03 percent in 1980-81, to 23.24 percent

in 1990-91, to 23.51 percent in 2000-01, and to 24.71 percent in 2006-07.

Thus, the share of secondary sector in GDP has registered a small change

of about 2 percent over the last more than two and a half decades (1980-

81 to 2006-07).

But the share of tertiary sector in GDP has increased significantly

from 29.54 percent in 1950-51 to 30.31 percent in 1960-61, to 33.55

percent in 1970-71, to 38.04 percent in 1980-81, to 42.72 percent in

1990-91, to 50.32 percent in 2000-01, and finally to 54.74 percent in

2006-07. The most striking change in share of tertiary sector in GDP has

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been observed since 1990's, i.e., during the reforms period. Thus, the

tertiary sector has emerged as a dominant sector of the economy with

more than half a share of GDP. The emerging structure of the Indian

economy is characterized by tertiary sector led growth with continuously

shrinking share of primary sector and nearly stagnant share of secondary

sector. In such a situation, it is a high time to analyze the linkage

dynamics of tertiary sector with other two sectors of the economy.

Table 4.5: Sectoral shares in gross domestic product in India at 1999-2000 prices

Year Sector GDP

Primary Secondary TertiaryRs.

Crore Percent Rs. Crore Percent Rs.

Crore Percent Rs. Crore

1950-51 127062 56.84 30618 13.62 66418 29.54 224786

1960-61 172433 52.69 56143 17.00 99993 30.31 329825

1970-71 217862 45.95 96642 20.50 159087 33.55 474131

1980-81 256342 39.93 141420 22.03 244159 38.04 641921

1990-91 368907 34.04 251868 23.24 462797 42.72 1083572

2000-01 487992 26.17 438372 23.51 937937 50.32 1864300

2006-07 588530 20.55 707845 24.71 1567934 54.74 2864309 Source: Economic Survey of India, various issues.

4.1: Growth Profile of Different Sectors

The decade-wise periodic breakdown underscores some interesting

facets of underlying dynamics of different sectors in the economy. Table

4.6 depicts that growth rate of GDP has remained around 4 percent during

the fifties and sixties, but after that it reduced to 3.54 percent during

seventies. But in eighties it picked up and reached 6.88 percent and then

further to 7.21 percent in the nineties, i.e., the reforms period.

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The primary sector grew at the rate of 3.57 percent in the fifties,

but it declined to 2.63 percent in sixties. It touched an all time low of 1.77

percent during the era of seventies. But it improved to 4.44 percent during

the eighties to roll back to 3.23 percent during the nineties. Thus, the

growth rate of primary sector in terms of latest percentage growth rate is

even less than what it was in the fifties. On the other hand, the secondary

sector has shown consistently a good performance. With the exception of

the decade of seventies, its percentage growth rate has always been above

7 percent per annum. In contrast to general expectations, the percentage

growth rate of secondary sector is slightly lower during the nineties as

compared to eighties. However, it should have improved due to the

impact of changed policy regime of the nineties. The percentage growth

rate of tertiary sector has remained consistent around 5 percent during the

first three decades of economic planning. However, after that it picked up

to 8.95 percent during the eighties, i.e., pre-reform period to touch to an

all time high of 10.27 percent in the nineties, i.e., the reforms period.

In response to the new policy regime and spate of reforms,

different sectors of the economy depict a differential behavior pattern.

The impact of reforms on different sectors is not uniform on all the

sectors. The tertiary sector has responded positively with largest share in

GDP and with a high growth rate of more than 10 percent. But the

primary sector has responded adversely to the process of economic

reforms of the nineties. The declining share in GDP and damped growth

rate of primary sector is a self-speaking fact. The secondary sector, with

signs of indifference, is still in its transitional phase of making

adjustments among different factors like labour, capital and technology

etc. in the economy.

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Table 4.6: Percentage annual growth rate of GDP of different sectors in India at 1999-2000 prices

Year GDP SectorPrimary Secondary Tertiary

1950-51 to 1960-61 4.67 3.57 8.33 5.061960-61 to 1970-71 4.37 2.63 7.21 5.911970-71 to 1980-81 3.54 1.77 4.63 5.351980-81 to 1990-91 6.88 4.44 7.81 8.951990-91 to 2000-01 7.21 3.23 7.40 10.272000-01 to 2006-07 5.36 2.06 6.15 6.72

Source: Computed

4.2: Relative Shares of Different Sub-Sectors of Tertiary Sector

Relative share of different sub-sectors of tertiary sector are given in

table 4.7. It is indicative of the fact that almost all the sub-sectors of the

tertiary sector have registered an increase in percentage share of GDP

over the entire period of 1950-51 to 2006-07. The most consistent and

highest share has been observed in the sub-sector ‘trade, hotels, transport

and communication’ from 11.30 percent in 1950-51 to 18.34 percent in

1990-91, and to 26.82 percent in 2006-07. Thus, its latest share has more

than doubled as compared to what it was during the beginning. In the

recent years, it is the communication segment which has witnessed more

growth as compared to other segments of this sub-sector. The sub-sector

‘finance, insurance, real estate and business services’ have opened a new

vista especially after opening up of the Indian economy in 1990's. The

percentage share of this sub-sector in GDP after remaining constant

around 7 percent up to 1980-81 increased to 10.58 percent in 1990-91 and

it has further improved to 14.31 percent in 2006-07. In comparison to

‘real estate and insurance’, it is the ‘finance and business services’

segment that has registered a major share in this sub-sector. Due to the

encouragement given by the Government to the policy of liberalization

and privatization in the area of banking and finance, many new business

services like tele-banking, event management and advertising (both print

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and media) have now emerged on the surface. The relative percentage

share of sub-sector, ‘public administration, defence and other services’

has also shown almost a consistent increase in GDP from 10.57 percent in

1950-51 to 13.61 percent in 2006-07. This may be attributed to the fact

that the process of economic development involves rapid expansion of

social and economic welfare services such as education, public health and

family welfare etc.

Table 4.7: Gross domestic product in terms of percentage at factor cost by industry of origin in India at 1999-2000 prices

YearPrimary Sector

Secondary Sector

Tertiary Sub-Sectors Gross Domestic Product at Factor Cost

Trade, Hotels, Transport and Communication

Finance, Insurance, Real Estate and Business Services

Public Adm., Defence and other Services

1950-51 56.84 13.62 11.30 07.67 10.57 1001960-61 52.69 17.00 13.00 07.00 10.31 1001970-71 45.95 20.50 14.72 06.82 12.01 1001980-81 39.93 22.03 17.45 07.49 13.10 1001990-91 34.04 23.24 18.34 10.58 13.80 1002000-01 26.17 23.51 22.29 13.05 14.98 1002006-07 20.55 24.71 26.82 14.31 13.61 100

Source: Computed

4.3: Growth Profiles of Different Tertiary Sub-Sectors

The table 4.8 reveals that almost all sub-sectors of tertiary sector

have registered high rates of percentage growth over the entire period of

1950-51 to 2006-07. In the sub-sector trade, hotels, transport and

communication the growth rate hovered around 6 percent during the

decades of fifties; sixties and seventies to 7.75 percent in eighties then it

further improved to 10.09 percent per annum in nineties. During the first

three decades the sub-sector ‘finance, insurance, real estate and business

services’ grew at a rate of 3 percent to 4 percent and then all of a sudden

touched the percentage growth rate of more than 10 percent per annum. It

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is clear from the further disaggregation that most of the growth in tertiary

sector in the decade of eighties was due to real estate segment, whereas

the growth rate of nineties was due to high growth rate of the finance and

business services segment. The growth rate of the sub-sector ‘public

administration, defence and other services’ fluctuated between 4 percent

to 6 percent per annum over the first three decades and then it improved

to 7.76 percent in the eighties; and to 8.70 percent in the nineties, i.e., in

the reforms period. Sub-sector wise growth profile of the tertiary sector

shows that within tertiary sector, over a period of time all the sub-sectors/

segments have not grown uniformly. Tertiary sector growth of decade of

eighties was led by real estate segment, whereas the growth of nineties

was due to high growth rate of the finance and business services segment.

Currently the trading, hotels and communication segment is leading the

growth of tertiary sector. Within this sub-sector, the growth leader is the

communication segment followed by trading, transport and hotels, in

order.

Table 4.8: Percentage annual growth rates of different sub-sectors of tertiary sector in India at 1999-2000 pricesYear Sub-sectors of tertiary sector

Trade, hotels, transport and communication

Financing, insurance, real estate and business services

Public administration, defence and other services

1950-51 to 1960-61 6.88 3.40 4.311960-61 to 1970-71 6.28 3.99 6.741970-71 to 1980-81 6.04 4.87 4.771980-81 to 1990-91 7.75 13.86 7.761990-91 to 2000-01 10.09 11.19 8.702000-01 to 2006-07 8.47 6.87 3.97

Source: Computed

Three broad conclusions follow from the above analysis and

discussion. Firstly, during the initial period of economic planning in India

the primary sector was the dominant sector of the economy and

accounted for largest share in GDP. Secondly, the whole scenario

changed especially after the emergence of the reforms period of 1990s.

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Now the tertiary sector has emerged as a dominant sector of the economy

with more than half share in GDP. It has grown by bypassing the

secondary sector. It is to be noted here that while primary and secondary

sectors have experienced phases of deceleration, stagnation and growth,

the tertiary sector has shown a uniform growth trend over the entire

period of study from 1950-51 to 2006-07. In fact, the recent years

experience shows that the growth of tertiary sector has imparted

resilience to the economy, particularly in times of adverse agricultural

shocks as also during cyclical downturns in industry in the past. Thirdly,

so far the GDP share and growth profiles of different sub-sectors of the

tertiary sector are concerned the communication, finance, insurance and

business services segment have grown well above that of the economy

especially during the reform process of 1990's. During the last ten years

the communication segment alone has grown by more than three times.

Finally, the Indian economy is now passing through a transitional phase

to ultimately culminate into a tertiary sector led economy. But the long-

term sustainability of such a tertiary sector led economy with weak

primary and secondary sectors is a million dollar question.

4.4: Sectoral Demand Decomposition Analysis

Next to sector-wise shares and growth rates, it is important to

identify the key drivers of output in each sector. The change in output is a

function of change in its components. The percentage change in the four

components: domestic final demand expansion, export expansion, import

substitution and intermediate demand expansion in the aggregate output

of the Indian economy in three sectors, primary, secondary, and tertiary

sector, is given in Table 4.9 Among the four components of aggregate

output the components, which contribute the maximum, have been

considered to be the dominant component. The Indian economy is said to

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be domestic final demand driven if the contribution of domestic final

demand expansion is the maximum and export driven if the contribution

of export expansion has been the maximum and so on. On the whole,

during the new regime, the Indian economic growth has been primarily

import substitution driven and there is no visible technological change in

the system

As per Table 4.9, the percentage contribution of domestic final

demand, in tertiary sector, to total output growth have been 284.83 per

cent followed by exports contributing 30.60 percent, intermediate demand

contributing -2.39 per cent, import substitution contributing -213.04 per

cent. So, the tertiary sector output growth, basically a domestic demand

driven, has also got a boost from export growth contribution. On the

domestic front, with the natural growth mechanism, many of the services

that earlier used to be luxuries or comforts have become necessities now,

due to easy availability and enhanced affordability of the masses. Further,

many of the services that were a part and parcel of secondary sector have

been outsourced to independent tertiary sub-sectors. On the export

component of demand, the internationalization and business process

outsourcing has also played a catalytic role in this regard. Import

substitution component of output growth has remained subdued and

major technological breakthrough is not visible in the system as far as the

tertiary sector growth is concerned. It is the domestic and the

international demand that has led the output growth of tertiary sector in

India.

Table 4.9: Sector-wise percentage contribution of components to output in India during 1993-94 to 2003-04

Sr.No.

Sector Percentage change in final demand

Percentage change in export expansion

Percentage change in import

substitution

Percentage change in intermediate

Demand1 Primary 20.69 -5.13 98.74 -14.302 Secondary -167.03 -59.57 830.11 -503.523 Tertiary 284.83 30.60 -213.04 -2.39

India -182.10 -50.01 644.44 -312.33

94

Source: Calculated

A comparative analysis of the three sectors underscores the fact

that in primary and secondary sector, the component of import

substitution is dominating, but in tertiary sector the component of import

substitution is the least affecting component. In primary and secondary

sectors, the component of import substitution is showing a positive

change and in tertiary sector the component of import substitution is

showing a negative change. In primary and secondary sector the

component of intermediate demand component is decreasing, but this

component is the least affecting component of aggregate output.

However, in tertiary sector the component of intermediate demand is also

decreasing, yet in this component is affecting more to the aggregate

output of the tertiary sector than the other two sectors.

Thus, on the whole the much needed technological change is

missing in the system. The primary sector is banking upon domestic

demand and import substitution component and the secondary sector is

relying on import substitution alone. The resulting tertiarization of the

Indian economy is the outcome of enhanced domestic and international

demand and that too in the absence of any major technological change in

the system.

The emerging economic structure of India, characterized by

excessive tertiarization, is basically driven by import substitution demand

coming from primary and secondary sectors and domestic demand

coming from primary and tertiary sectors. The export demand has played

a significant role in tertiary sector, but the other two sectors have lagged

behind in this regard. Much needed change in the intermediate input

demand component, that signifies technological change, is altogether

missing in the system. In such a situation, the very viability of over-

95

grown tertiary sector also comes under scanner.

4.5: Spatial and Temporal Patterns in the Structure

Spatial and temporal patterns of sectoral shares of tertiary sector in

relation to other sectors are presented in Table 4.10. At the onset of

effects of new policy regime, in 1993-94, the share of primary, secondary

and tertiary sector in the national income was 35.90, 21.30 and 42.80

percent respectively. It was a period when the tertiary sector had started

taking off. The share of a sector when related to per capita level of the

states shows that level of per capita income (PCI) of a state and the

primary sector share are inversely correlated. That is higher per capita

income means the lower share of primary sector and vice-versa. On the

other hand, there is a positive and statistically significant correlation

between PCI level and the share of secondary and the tertiary sector.

At the juncture of new regime some of the states/union territories

were in an advantageous position as far as the tertiary sector level of

development is concerned. The states/union territories with above

national average share of tertiary sector in national income were Delhi,

Goa, Andhra Pradesh, West Bengal, Jammu and Kashmir, Kerala,

Maharashtra, North-Eastern states and group of union territories. On the

other hand, low PCI states like Bihar and Orissa were primary sector

dominated states. The state of Punjab with higher PCI was a primary

sector dominant state. So, the larger percentage share of tertiary sector in

state domestic product was confined to union territories or some

specifically endowed states. In the year 2004-05, all states joined the

tertiary sector led growth bandwagon except the states of Chhattisgarh,

Jharkhand, Himachal Pradesh and Punjab. Out of these tertiarization

trailing states, Himachal Pradesh replaced its primary sector by

96

industrialization, but Punjab has missed the bus and has remained

traditionally a primary sector led economy. This explains the position

97

Table 4.10 : State/ union territory-wise sectoral shares in state domestic product in relation to per capita income for selected years

Sr.No. State and Union Territories 1993-94 2000-01 2004-05

PCIValue Rank Primary Secondary Tertiary PCI

Value Rank Primary Secondary Tertiary PCIValue Rank Primary Secondary Tertiary

1 Andhra Pradesh 7416 12 38.01 18.78 43.21 10195 12 33.14 18.86 48.00 12352 12 28.30 20.08 51.622 Assam 5715 21 48.04 13.36 38.60 5943 20 42.43 13.13 44.44 6721 22 36.91 13.58 49.513 Bihar 3037 24 51.50 8.59 39.91 3831 24 46.34 8.56 45.10 3773 24 42.55 9.96 47.494 Chattisgarh 6539 18 42.08 27.31 30.61 6423 19 34.71 22.90 42.39 8266 17 33.16 26.09 40.755 Delhi 18166 1 4.19 24.88 70.93 26523 1 1.46 22.12 76.42 31345 1 1.05 19.06 79.896 Goa 16558 2 21.46 31.85 46.69 25710 2 12.30 37.80 49.90 24797 3 15.89 33.59 50.527 Gujarat 9796 7 26.88 33.29 39.83 14289 4 18.28 33.74 47.98 16878 5 20.06 34.66 45.288 Haryana 11079 6 42.82 25.39 31.79 13848 6 33.05 25.37 41.58 16872 6 28.05 24.98 46.979 Himachal Pradesh 7870 10 35.99 25.29 38.72 11085 9 24.78 33.50 41.72 13471 10 23.98 34.90 41.1210 Jammu & Kashmir 6543 17 37.52 17.59 44.89 7385 16 36.99 11.98 51.03 8075 19 36.73 11.36 51.9011 Jharkhand 5897 20 41.88 28.84 29.28 6569 18 41.90 29.92 28.18 8025 20 39.37 32.61 28.0212 Karnataka 7838 11 38.09 23.99 37.92 11854 8 32.31 22.05 45.64 13820 9 20.27 24.99 54.7413 Kerala 7983 9 32.24 20.31 47.45 10714 11 20.15 20.67 59.18 13321 11 16.60 18.69 64.7114 Madhya Pradesh 6584 16 45.70 18.6 35.70 7195 17 31.44 27.02 41.54 8238 18 34.50 23.22 42.2815 Maharashtra 12183 5 21.22 31.15 47.63 14233 5 17.72 25.80 56.48 17864 4 12.80 25.81 61.3916 Orissa 4896 23 48.58 16.1 35.32 5549 23 38.99 14.64 46.37 7176 21 38.63 15.11 46.2617 Punjab 12710 4 48.23 19.82 31.95 15071 3 41.96 21.39 36.65 16756 7 38.66 21.46 39.8818 Rajasthan 6182 19 37.12 23.35 39.53 8175 14 28.25 26.23 45.52 9853 16 29.37 25.75 44.8819 Tamil Nadu 8955 8 26.24 32.16 41.60 12994 7 18.96 30.83 50.21 13999 8 14.68 26.54 58.7820 Uttar Pradesh 5066 22 41.74 19.19 39.07 5575 22 37.80 20.25 41.95 6136 23 35.77 19.74 44.4921 Uttranchal 6896 13 41.18 23.02 35.80 7883 15 39.30 19.13 41.57 10584 14 30.43 24.31 45.2622 West Bengal 6756 15 35.89 21.31 42.80 5575 21 28.73 20.51 50.76 12271 13 24.19 18.65 57.1623 North-Eastern States* 6831 14 35.69 13.33 50.98 9796 13 31.06 18.58 50.36 10513 15 28.92 18.74 52.3424 Group of UTs** 14427 3 14.51 26.15 59.34 11021 10 7.02 35.08 57.90 30111 2 4.49 39.55 55.96

All India 7388 35.90 21.30 42.80 9362 39.65 18.25 42.10 11097 24.25 23.26 52.49 Correlation with PCI -0.792 0.553 0.601 -0.734 0.502 0.534 -0.862 0.518 0.566

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Source: National Accounts Statistics, various issues.of Punjab in terms of PCI

in relation to other states. The higher PCI is a function of

secondary sector or tertiary sector development level.

4.6: Employment in Tertiary Sector

The changes in the sectoral composition of GDP and

employment have taken place and there is a ‘tertiarization’ of the

structure of production and employment in India. During the

process of economic growth, the Indian economy has experienced

a change in production structure with a shift away from agriculture

towards industry and tertiary sector. However, the shift in

employment corresponding to shift in the sectoral shares of GDP

has not been accompanied by similar quantum. A comparative

view of Tables 4.5 and 4.11 depicts that between the years 1950-51

to 1970-71 the GDP share of the primary sector has although

declined from 56.84 percent to 45.95 percent, but during the same

period the percentage share of labour force in this sector has

remained stagnant at around 70 percent. However, after that the

GDP share of primary sector has shown a continuous decline from

39.93 percent in 1980-81, to 34.04 percent in 1990-91, to 26.17

percent in 2000-01 and to 20.55 percent in 2006-07. In comparison

to that the corresponding percentage share of employment showed

only a marginal decline from 68.80 percent in the year 1980-81, to

66.80 percent in 1990-91, to 57.40 percent in 2000-01 and to 50.20

percent in 2006-07. Thus, half of India’s labour force is still

engaged in primary sector activities, whereas its percentage

contribution in GDP has come down to merely one fifth in

percentage terms.

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The share of secondary sector in GDP has shown a marginal

increase from 13.62 percent in 1950-51, to 17.00 percent in 1960-

61, to 20.50 percent in 1970-71 and to 22.03 percent in 1980-81.

However, after that it became stagnant at around 23.00 percent

during the years 1990-91 to 2000-01 and then to again slightly

improve to 24.71 percent in 2006-07. In comparison to that the

corresponding share of employment in the secondary sector has

remained more or less stagnant around 12.00 percent over a long

period from 1950-51 to 1990-91. However, after the introduction

of new policy regime it has shown a marginal improvement in its

share of labour force from 16.80 percent in 2000-01 to 20.40

percent in 2006-07. Thus, the percentage share of labour force in

secondary sector has moved almost similar to that of its GDP

share, but in India the level of labour productivity in this sector has

been quite low.

The share of tertiary sector in GDP has shown a substantial

increase from 29.54 percent in 1950-51, to 30.31 percent in 1960-

61, to 33.55 percent in 1970-71, to 38.04 percent in 1980-81, to

42.72 percent in 1990-91, to 50.32 percent in 2000-01 and to 54.74

percent in 2006-07. In comparison to this, initially the employment

share has shown a slightly declining trend from 17.20 percent in

1950-51 to 16.00 percent in 1960-61. But after that it has shown a

somewhat increasing trend from 16.70 percent in 1970-71, to 17.70

percent in 1980-81, to 20.50 percent in 1990-91, to 25.80 percent

in 2000-01 and to 29.40 percent in 2006-07. However, in India this

proportionate change is very slow and does not conform well to the

experience of developed countries.

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Table 4.11: Percentage sectoral shares in employment of IndiaYear Sector

Primary Secondary Tertiary1950-51 72.10 10.70 17.201960-61 71.80 12.20 16.001970-71 72.10 11.20 16.701980-81 68.80 13.50 17.701990-91 66.80 12.70 20.502000-01 57.40 16.80 25.802006-07 50.20 20.40 29.40

Source: National Accounts Statistics, various issues.

Sectoral shares of employment in India at two points of time,

1993-94 and 2004-05, are presented in Table 4.12 . It is indicative

of the fact that in rural area, in the year 1993-94, the share of

primary sector in employment was 79.00 percent. For the same

year, in rural area, the share of secondary was 9.60 percent and that

of the tertiary sector was 11.40 percent. That is to say, in the year

1993-94, the rural area was predominantly a primary sector

dominated with share of 79.00 percent and the share of other two

sectors was just 21.00 percent. As against the rural area, in the year

1993-94, the employment share of primary sector in urban areas

was 13.50 percent. For secondary sector, the share for the same

period was 31.00 percent and for that of tertiary sector, it was

55.00 percent. This means, the urban area employment is primarily

a tertiary sector led and the share of secondary sector is also

significant; but the share of primary sector in employment is very

negligible.

At the disaggregation of gender, the table shows that, in the

year 1993-94, the employment share of female, in primary sector in

the rural area, was 86.00 percent as compared to that of male which

was at 74.80 percent. In the secondary sector in rural area, the

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employment share of female in 1993-94, was 8.00 percent against

that share of male which was at 10.50 percent. As against the share

of 5.40 percent for female, it was 14.70 percent for male in tertiary

sector in rural area in the year 1993-94. Gender-wise analysis of

the table underscores the fact that in rural areas in 1993-94, the

share of female workforce in primary sector activities is slightly

higher than male, but it is other way round in case of secondary

sector. Employment opportunity of newly emerging tertiary sector

is shared more by male than the female.

In urban areas, in 1993-94, the share of female workforce in

employment in primary sector is 25.30 percent as compared to

10.30 percent in case of male. It is almost 2.5 times for female as

compared to the male. In secondary sector, there is a marginal

difference. But the employment share in urban area in tertiary

sector is 58.10 percent for male as compared to the 46.30 percent

for female.

When the employment share statistics for the year 2004-05

are compared with the year 1993-94, the temporal variation is not

that very pronounced. In rural area, employment share of primary

sector has reduced from 79.00 percent to 73.20 percent and the

larger share of this reduction has gone in favour of male chunk of

the population. In urban area, the employment share has shrunk

from 13.50 percent to 9.60 percent, but here the larger share of

shrinkage has gone to the female as compared to the male

counterpart. The employment share of secondary sector in rural

area improved from 9.60 percent to 13.20 percent and the larger

gainer is the male population. The employment share of secondary

sector, in urban area improved from 31.00 percent to 33.30 percent

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and the larger gainer is the female population. Temporal change, in

rural employment share, in tertiary sector displays a rise to 13.60

percent in 2004-05, as compared to 11.40 percent in 1993-94; and a

larger part of this rise has gone to the male workforce. Similarly,

the temporal change, in urban employment share, in tertiary sector

displays a rise to 57.10 percent in 2004-05, as compared to 55.00

percent in 1993-94; and a larger part of this rise has gone to the

female workforce.

Spatial structure of the Indian economy is characterized by

the dominance of rural workforce in the primary sector and that of

urban workforce in the secondary and tertiary sector. Urban area is

a supplier of 57 percent of the workforce compatible to the tertiary

sector’s share of more than 54 percent in the GDP. Sectoral

employment shares have displayed a marginal decrease in primary

sector and slight rise in secondary and tertiary sectors. In rural

areas, in primary sector, the shrinkage in employment has been

shared more by the male workforce and enhanced opportunity in

employment, in secondary and the tertiary sector has also gone in

favour of the male workforce. That is to say emerging opportunity

in the rural secondary and tertiary sector has been availed by a shift

of male workforce from primary to other two sectors. On the other

hand, in urban areas, in primary sector, the shrinkage in

employment has been shared more by the female workforce and

enhanced opportunity in employment, in secondary and the tertiary

sector has also gone in favour of the female workforce. That is to

say emerging opportunity in the urban secondary and tertiary sector

has been availed by a shift of female workforce from primary to

other two sectors. One line conclusion that follows from this

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discussion is that tertiary sector led growth of GDP is urban centric

and new opportunities of this growth are being shared by the

female workforce also, but in the rural area, any marginal change is

shared by the male workforce only.

Table 4.12: Sectoral share in employment of usually working in India

Sector AreaAggregation Level

Year

1993-94 2004-05Primary Rural Male 74.80 67.10

Female 86.00 83.50 Total 79.00 73.20

Urban Male 10.30 07.00Female 25.30 18.30 Total 13.50 9.60

Secondary Rural Male 10.50 14.90Female 08.00 09.90 Total 09.60 13.20

Urban Male 31.60 33.50Female 28.40 32.20 Total 31.00 33.30

Tertiary Rural Male 14.70 18.00Female 05.40 06.60 Total 11.40 13.60

Urban Male 58.10 59.50Female 46.30 49.50Total 55.00 57.10

Source: Calculated

4.7: Distribution of Workforce in Tertiary Sub-sectors

Area and gender-wise distribution of workforce in various

sub-sectors of tertiary sector is given in Table 4.13. Trade, hotels

and communication form a major chunk as far as the employment

is concerned. In year 2000-01 in urban area 72.88 percent of the

workforce was engaged in this sector. This share has comes down

to 49.62 percent in just a span of four years in 2004-05. In this

reduced share of employment, male is the major sufferer, as

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compared to the female. In rural areas this sub-sector has not

shown any change as far as the employment share is concerned.

But within the same share of employment, the share of female has

improved and the space has been vacated by the male.

Table 4.13: Area and gender-wise distribution of workforce in sub-sectors of tertiary sector

Sno Sub-sectors of Tertiary Sector Area Aggregation Level

Year|

2000-01|2004-05

1 Trade, Hotels, Transport and Communication Rural Male 67.05 61.10

Female 38.00 43.90

Total 60.53 60.45Urban Male 65.12 57.66

Female 30.74 27.58

Total 72.88 49.62

2 Financing, Insurance, Real Estate and Business Services Rural Male 2.31 3.79

Female 0.00 2.62

Total 1.79 1.79Urban Male 8.80 6.97

Female 5.47 4.36

Total 6.84 7.30

3 Public Administration, Defence and Other Services Rural Male 30.64 35.11

Female 62.00 53.48

Total 37.66 37.66Urban Male 26.08 35.37

Female 63.79 68.06

Total 20.26 43.07Source: Calculated

Next sub-sector is the financing, insurance, real estate and

business services. The share of employment in these sub-sectors, in

urban area, has improved to 7.30 percent in 2004-05 as compared

to 6.84 percent in the year 2000-01. But in rural area, the share is

stagnant at 1.79 percent. Entry of female in this sub-sector in the

rural area is a new phenomenon. In the new policy regime, in

‘public administration’ sub-sector, the ‘defence’ and ‘other

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services’ sub-sector component dominates the sector. In urban

areas, the employment share which was 20.26 percent in 2000-01

has touched the level of 43.07 percent in the year 2004-05. Both

the sexes are gainers in the employment with male slightly on the

higher side. On the other hand, the rural area is almost stagnant in

this aspect with minor adjustment of employment in favour of male

labour.

On the whole, sub-sectorwise employment has depicted a

higher change in the urban area as compared to the rural area. In

this process of change in employment structure, female are

appearing as major gainer of the change as far as the new

employment opportunities in the tertiary sector are concerned.

4.8: Spatial and Temporal Patterns in Output/Labour

The spatial and temporal patterns of output/labour ratio in

tertiary sector in relation to other sectors are presented in Table

4.14. The output/labour ratio gives the output produced per unit of

labour. In the cross-section dimension of states, it gives the

efficiency of labour for a particular sector. In 1993-94, the

output/labour ratio in primary, secondary and tertiary sector at the

national level was 0.78, 1.05 and 1.28 respectively. That is to say,

at the time of take off stage of tertiary sector, the efficiency of

labour was the highest in tertiary sector as compared to the other

two sectors. Two important facts emerge out of this table. First,

invariably, the states/union territories with higher output/labour

ratio in tertiary sector have a higher per capita income and

secondly, during the new policy regime, the output/labour ratio has

improved in almost all the states/ union/territories. Since, the

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labour in general and the intellectual capital in particular is the

major input in tertiary sector, so states/union territories with higher

labour efficiency are leading the tertiarization process. This is a

lesson for the states trailing in this revolution that if higher growth

level of income and higher PCI is to be achieved, the key to

success lies in the development of human resources.The

tertiarization of a region is a function of intellectual capital

endowments of that region.

Hence to sum up, we can say that analysis of structural

change is indicative of the fact that transformation of Indian

economy from primary to tertiary sector has bypassed the

secondary sector altogether. In developed countries of the world,

employment and output share in the tertiary sector has grown at a

synchronous pace, but the Indian experience is otherwise. In India,

the output share of tertiary sector has outnumbered the

corresponding employment share which is matter of concern from

the policy point of view.

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Table 4.14: State/ union territory-wise sectoral output/labour ratios in relation to per capita income for selected years S. No State / Union Territories Output/Labour Ratio

1993-94 2000-01 2004-05Primary Secondary Tertiary Primary Secondary Tertiary Primary Secondary Tertiary

1 Andhra Pradesh 0.77 1.02 1.33 0.81 0.82 1.34 0.67 0.99 1.372 Assam 1.09 1.46 0.83 0.99 1.03 0.99 0.91 1.15 1.043 Bihar 1.03 0.59 1.12 0.93 0.60 1.24 0.86 0.73 1.284 Chattisgarh 0.00 0.00 0.00 0.69 1.25 1.37 0.65 1.57 1.255 Delhi 0.64 0.61 1.34 1.62 0.56 1.28 0.29 0.63 1.216 Goa 0.72 1.42 0.98 0.00 0.00 0.00 0.72 1.44 0.927 Gujarat 0.61 1.33 1.28 0.41 1.29 1.66 0.47 1.26 1.518 Haryana 1.02 1.20 0.86 0.84 1.21 1.04 0.74 0.97 1.299 Himachal Pradesh 0.73 2.05 1.01 0.57 1.84 1.09 0.61 1.30 1.2110 Jammu & Kashmir 0.83 1.27 1.09 0.97 0.55 1.28 0.94 0.41 1.5711 Jharkhand - - - 1.11 1.02 0.85 0.88 1.47 0.8512 Karnataka 0.75 1.22 1.27 0.74 0.89 1.45 0.45 1.23 1.5713 Kerala 0.77 0.88 1.35 0.57 0.89 1.42 0.56 0.70 1.4814 Madhya Pradesh 0.83 1.33 1.15 0.66 1.31 1.29 0.71 1.27 1.2815 Maharashtra 0.46 1.60 1.39 0.41 1.09 1.71 0.29 1.22 1.7516 Orissa 0.97 0.99 1.04 0.91 0.64 1.36 0.91 0.71 1.2717 Punjab 1.15 0.98 0.84 1.12 0.79 1.03 1.06 0.83 1.0518 Rajasthan 0.75 1.17 1.29 0.65 1.05 1.45 0.66 1.03 1.4719 Tamil Nadu 0.63 1.20 1.32 0.51 0.98 1.59 0.40 0.91 1.7420 Uttar Pradesh 0.88 1.03 1.16 0.88 0.92 1.12 0.86 0.78 1.3521 Uttranchal - - - - - - 0.67 1.46 1.1922 West Bengal 1.01 0.77 1.16 1.02 0.63 1.29 0.72 0.72 1.4023 North-Eastern States* 0.83 1.22 1.11 0.79 1.37 1.07 0.67 1.67 1.1424 Group of Uts** 0.42 1.09 1.43 0.25 1.39 1.25 0.18 1.35 1.23

All India 0.78 1.05 1.28 0.99 0.79 1.14 0.65 1.08 1.28 Source: Calculated

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