Sectors of the Indian Economy

An economy is made up of countless activities (farming, manufacturing, teaching, banking). To make sense of them, economists group them into sectors. The way a country's activity and employment are divided among these sectors tells us a great deal about how developed it is. It also reveals where its problems lie. The sectors of the Indian economy are a core, frequently tested topic.

Economic activities are classified into three sectors by the kind of work:

• Primary sector: activities that use natural resources directly: farming, fishing, mining, forestry. It is also called the agriculture sector.
• Secondary sector: activities that make goods by processing raw materials in factories: manufacturing and industry. Also called the industrial sector.
• Tertiary sector: activities that provide services rather than goods: transport, banking, trade, education, health. Also called the service sector.

The three are linked: industry needs raw materials from the primary sector, and services support both.

A different cut, often used in economic policy, separates the real sector from the financial sector:

• Real sector: the actual production of goods and services. A farmer harvesting crops and a textile mill converting cotton into fabric both belong to the real sector.
• Financial sector: activities that deal in money and financial claims rather than production. A bank lending money, or a company issuing Rupee Denominated Bonds (rupee-priced bonds sold to investors abroad), belongs to the financial sector, not the real sector.

Note the difference from the three-sector scheme. There, banking counts as a tertiary service. In the real-versus-financial division, banking and bond issuance sit outside the real sector because they move money, not goods or productive services.

Whatever the sector, every act of production combines four inputs. These are called the factors of production:

• Land: natural resources such as soil, water, forests and minerals.
• Labour: the people who do the work, whether skilled or unskilled.
• Physical capital: the tools, machines, buildings and money needed to produce. It is of two kinds: fixed capital (tools and machines that last many years) and working capital (raw materials and cash used up in production).
• Human capital: the knowledge and enterprise to bring the other three together and produce something useful.

Production is simply the combining of these four factors to create goods and services.

Over time the importance of the sectors changes. In India:

• The primary sector still employs the most people (a large share work in farming).
• But the tertiary sector has become the largest producer of value, contributing the biggest share of the country's output.

The full ranking of GDP shares is worth fixing in memory. Services contribute the most, industry comes second, and agriculture contributes the least. So the order is services, then industry, then agriculture. Agriculture's small output share, set against its huge employment share, is the mismatch at the heart of this topic.

Within the service sector itself, the shares around 2000–01 (measured at factor cost) followed a clear order. Trade, hotels, transport and communication contributed the most. Financing, insurance, real estate and business services came next. Agriculture, forestry and fishing followed, and manufacturing contributed the least among these groups.

This creates a problem. Too many people remain stuck in low-earning farm work in the primary sector. The fast-growing service sector does not create enough jobs for them. Shifting workers from farming to better-paid jobs is one of India's key challenges.

The primary sector's employment problem begins with a hard limit: the area of cultivable land is fixed. It cannot be expanded. Farmers therefore raise output from the same land in two ways:

• Multiple cropping: growing more than one crop on the same field in a year. This is the most common way to increase production from a fixed piece of land. With a well-developed irrigation system, farmers can grow three crops a year.
• Modern farming methods: the Green Revolution (the shift to science-based farming that began in the 1960s) introduced high-yielding variety (HYV) seeds, along with chemical fertilisers, pesticides, tube-well irrigation and machinery. These greatly raised yields, though they also need more water and can harm the soil over time.

Even with these methods, fixed land cannot absorb a growing workforce. Rural areas therefore depend on non-farm activities for new jobs:

• Dairy: keeping buffaloes and selling milk.
• Small-scale manufacturing: simple production carried on at home or in small workshops with family labour.
• Shopkeeping and trade: running small shops that buy goods from towns and sell them in the village.
• Transport: rickshaws, tongas and trucks that carry people and goods, a fast-growing activity.

Expanding such non-farm work is the key to moving workers out of low-earning farm jobs.

Activities are also divided by conditions of work:

• The organised sector has regular, secure jobs. Workers have fixed hours, get paid leave, and are protected by laws (for example, employees of a registered factory or a government office).
• The unorganised sector has insecure, low-paid jobs with no legal protection (for example, casual labourers, street vendors and small workshops). Most Indian workers are in this sector and need protection and support.

A third way to divide the economy is by ownership:

• The public sector is owned and run by the government. Its main aim is the welfare of the people, so it provides services like railways, post, defence, schools and hospitals, even where profit is low.
• The private sector is owned by individuals or companies, and its main aim is profit.

Some activities are best provided by the public sector: basic services, costly infrastructure, and care for the poor. The private sector will not take them on if there is no profit. A good economy uses both sectors together.

Government-owned companies are called public sector undertakings (PSUs); those owned by the central government are Central Public Sector Enterprises (CPSEs). Examples of Government of India undertakings include Balmer Lawrie and Company Ltd. (a diversified manufacturing and services company), the Dredging Corporation of India (which dredges ports and waterways), and Educational Consultants India Ltd. (EdCIL) (which offers education consultancy).

Through disinvestment, the government sells part of its equity in CPSEs to raise money. Three points about Indian disinvestment are frequently tested:

• Use of proceeds: the money goes mainly to social-sector spending and to reducing the fiscal deficit (the gap between government spending and its revenue). It is not earmarked for repaying external debt.
• Control retained: the government generally keeps majority ownership and management control of the CPSEs it disinvests; selling a minority stake does not privatise the firm.
• Scale: disinvestment is partial by design, a way to raise resources while the enterprise stays public.

For financing infrastructure, the government constituted the Deepak Parekh Committee in 2007. Its task was to suggest measures for financing the development of infrastructure.

The private sector is made up of firms, and firms come in different legal forms. A Limited Liability Partnership (LLP), created by the LLP Act, 2008 (the law that introduced this hybrid form in India), combines features of a partnership and a company. An LLP is a corporate body with perpetual succession: it continues to exist even when partners change. Its internal governance can be settled by mutual agreement among the partners, and ownership and management need not be separate. Unlike a traditional partnership, an LLP has no upper limit on the number of partners. A newer vehicle for financing is the Infrastructure Investment Trust (InvIT), a trust that pools money from investors to own income-earning infrastructure such as roads and power lines. Interest income that an InvIT distributes to its investors is taxable in their hands. InvITs are also recognised as borrowers under the SARFAESI Act, 2002 (the law that lets lenders enforce security interests and recover dues without going to court).

How a firm spends and reports its money follows a few standard distinctions:

• Capital expenditure: spending that creates a long-term asset, such as acquiring new technology, machinery or buildings.
• Revenue expenditure: routine spending for day-to-day operations, such as wages, rent and repairs.
• Debt and equity: these are modes of financing, ways of raising money, not types of expenditure. Borrowing is debt finance; selling ownership shares is equity finance.
• Tangible assets: physical assets such as inventory, plant and machinery.
• Intangible assets: non-physical assets such as brand recognition, intellectual property and client mailing lists. Investment in these is called intangible investment.

Two tools help outsiders judge a firm's position. The balance sheet is a statement of a company's assets and liabilities at a point in time. It shows their size and composition, but it does not show profitability, which comes from the income statement. The Interest Coverage Ratio measures a firm's earnings relative to its interest obligations. Banks use it to assess both the present risk and the emerging risk of a firm before lending. A higher ratio means the firm is better able to service its debt.