ECONOMICS CHANGE IN PRODUCTION STRUCTURE OF THE ECONOMY
As an economy grows, its production structure changes. It moves from agriculture towards
manufacturing and structure changes. It moves from agriculture towards manufacturing and
services. It is understandable. You might have noticed that relatively well-off families spend
proportionately less on food items and more on manufactured items. You may also note in your
family that, as income increases, expenditure on items other than food increases more than
proportionately. But, you should note that normally absolute amount of expenditure does not,
broadly speaking, decline; in fact, increases but less than proportionately. It implies that
production structure should shift away from agriculture. Moreover, many agricultural products,
which used to directly reach the households, will now reach after some processing and through
long channel of distribution. Bread, noodles, sauces and juices are good examples. It means
activities of manufacturing and trade will increase. So, let us see how the production structure
has changed.
We know that hundreds of thousands of activities are always in operation in any modern
economy. Many activities emerge and some of them die down; some of them even re-emerge,
may be, in a modified form. But, it is difficult to discuss in terms of each single item. We often
aggregate them on the basis of similarity of products or nature of activities.
Our Central Statistical Organisation uses nine broad categories, called sectors. Six of them are
further subdivided in two/three/four subcategories. Industry as a sector does not occur in it;
industry is accommodated in ‘mining (and quarrying), manufac-turing and electricity’ In total,
there are 18 categories, sectors and sub-sectors, in which total economic activity of the country
is presented in the National Accounts Statistics.
There are, however, two three-fold classifications in which economists discuss changes in
production structure. One is agriculture, manufacturing/industry, and services and the other is
primary, secondary and tertiary. Besides cultivation of crops, agriculture includes livestock and
animal husbandry. But forestry and logging and fishing are clubbed with agriculture to make a
broad sector of ‘agriculture, forestry and fishing’ If we add the sector of mining and quarrying to
this sector, we can call it ‘primary sector’ as these activities are associated with nature.
The manufacturing sector is further subdivided into registered and unregistered manufacturing,
depending upon whether manufacturing units are registered under Factories Act 1948. Industry
may include manufacturing and mining and quarrying. On the other hand, if we club the sectors
of electricity, gas and water supply and construction with manufacturing, we can call it
‘secondary’ sector.
This is just a matter of convention. There may be differences between countries and within a
country changes in classification may occur over time. We did not have exactly the same
classification always. While new products gain entry with each major revision of national
accounts, some swapping of activities is possible. For example, earlier LPG gas was included in
the sector of electricity, gas and water supply, now it is part of manufacturing. While we shall
highlight some salient features of production structure or composition of output, it would be
interesting for you to do your own exercises and develop your own views on contributions of
different sectors.
Absolute Contribution of Different Sectors
It is easy to see that agriculture production has been continuously on increase and has increased
about fourfold. Since our Table does not include all the years, we do not find any drop in
agricultural production. There are many periods when agricultural production actually fell.
Whenever we notice a fall in the gross domestic product, a major reason is likely to be a fall in
agricultural production as its contribution to GDP had been substantial. We were most severely
hit in agriculture in the consecutive years of 1965 − 66 and 1966 − 67. These years, however,
gave us green revolution. We are now quite comfortable with the overall performance of
agriculture. Yet, we had had two-three years of setback in each of the decade. We should
remember that agriculture gives us food, milk and meat and gives to industry the raw material
needed particularly for consumer goods industries. Compared to agriculture, other sectors
included in primary sectors are small; the contribution of primary sector is found to have risen
only four times.
Manufacturing which contributed about Rs. 12, 500 crore in 1950 − 51, contributed to the tune
of Rs. 2, 00, 000 crore in 1999 − 2000, almost sixteen-fold increase over the period. Annual
construction activity also rose ten times. Construction does not mean only houses but also roads
and railway lines, dams, and canals, bridges and flyovers, etc. And also huts. Electricity, gas and
water supply were in nascent stage in the wee hours of Independence, contributing less than Rs.
500 crore at 1993 − 94 prices. Its contribution rose 60 times in 50 years. Overall contribution of
the secondary sector rose fifteen-fold.
Trade along with hotel and restaurant business rose fourteen-fold over the period while
transport along with storage and communication rose eighteen-fold. Financial and business
services including insurance and real estate also rose fifteen times while community, social and
personal services, including public administration and defence rose only eleven-fold. Thus, in
the second half of the twentieth century while the contribution of primary sector to GDP rose to
four fold that of secondary and tertiary sectors rose by fifteen fold each.
Relative Contribution of Different Sectors
Relative contribution of a sector depends on its own performance as well as that of other
sectors. As a result, despite positive contribution, a sector may lose relative position. Thus, while
agriculture contributed 50 per cent to the making of GDP in 1950 − 51, it contributes less than
25 per cent at the close of the century despite four-fold increase in its output. The contribution
of primary sector came down from close to 60 per cent to less than 30 per cent over the period.
The share of manufacturing in GDP has gradually risen from 9 per cent to 17 per cent over the
period. The share of electricity, gas and water supply, which was hardly one third of one per cent
rose to close to 2.5 per cent. The activity of construction, despite good rise in absolute terms, is
considered to be slackening; during the first twenty years, while the share rose from 4 per cent
to 6 per cent, during the last thirty years it fell back to 5 per cent. Secondary sector as a whole
raised its contribution from about 14 per cent to more than 24 per cent. The secondary sector is
closely contesting the primary sector as far as its contribution to the GDP is concerned. Let us
look at the tertiary sector. The share of contribution of activities of trade, hotel and restaurant
business rose from 8 − 9 per cent to 14 − 15 per cent while that of transport, storage and
communication rose from 3.3 per cent to 7.3 per cent over half the century. The contribution of
financial and business services increased from 6.7 per cent to 12.7 per cent while that of
community and personal services increased from 9.4 to 13.4 per cent. It may be noted that,
among the sectors within tertiary sector, in 1950 − 51, the contribution of community and social
services dominated the scene but it gradually gave way to trade but in the nineties sector of
financial and business services emerged as close contestant. However, it may be pointed out
that public administration and defence, which contributed to the tune of 3 per cent in 1950 − 51,
are now contributing more than 6 per cent. Within the broad category of community and social
services, the share of public administration and defence has risen from ⅓ to ½ over the period
Growth of Different Sectors
we can also derive a table giving us the rate of growth of different sectors. We have computed
only compound annual growth rates (Table 3.7). We should take these rates with a pinch of salt
as they crucially depend upon initial and final figures. Roughly speaking, agricultural situation
during sixties and seventies can be said to be bad as the rates of growth fell below that of
population. Foodgrains dominate in our agriculture and we cannot afford to import it. Even if
we import some agricultural produce, being a large country, we ought to produce enough
foodgrains ourselves. During the nineties, the growth of foodgrains production is somewhat
slackening. So long as it does not create bottleneck for raw material for industry and supply of
foodgrains does not fall short of domestic demand, we can afford a little lower growth rate in
future. The rate of growth of primary sector has always been lower than that of secondary and
tertiary sectors, which is a major reason for decline in its share.
Manufacturing sector activity grew at twice the rate of agriculture. The seventies were bad for all
sectors. Electricity, gas and water supply accorded a very low rate of growth of 4 per cent per
annum during the seventies. So was the case with construction. Secondary sector as a whole did
pretty well during the eighties, better than during the nineties.
The nineties belong to the tertiary sector, which grew at the rate of 7.8 per cent per annum. All
service sectors are growing faster in the nineties than they did in the eighties wherein
performance was better than that in the seventies in terms of growth. There are, one can see, a
couple of exceptions to this observation.
The overall movement seems to be away from primary/agricultural complex to secondary and
tertiary sectors. The drop in the share of agriculture is shared between secondary and tertiary
sectors; and as time passes the share of tertiary sectors is increasing faster than the share of
secondary sectors.
Changes by Other Segregations of Production
Three important divisions of activities are often discussed by scholars so far as production
structure is concerned. One is the division regarding location of activities, location being divided
between rural and urban areas. The second is on the basis of ownership of production
establishments, division being made between public and private. The third one is about
organised and unorganised sectors.
Division between Rural and Urban Areas
Agriculture is the industry of the country-side and manufacturing is the industry of the town,
said Adam Smith, father of Economics. As a habitation diversifies its economic activities, it
changes its status from rural to urban at some point meeting certain definitional marks. In
India, in last fifty years, the number of towns has increased from 2800 to 3600 and population
living in them has increased from a little over 6 crore to 26 crore. The proportion of population
living in urban habitation is now well over 25 per cent, which in 1950 − 51 used to be around 16
per cent. On the other hand, the number of villages is now about six lakh and a village may have
more than one hamlet. The number of rural habitations is over 10 lakh. Not only agricultural
and pastoral activities are carried out in rural habitations, manufacturing (handicrafts), trade
(retail), transportation (bullock carts and tractors) are also part of rural activities and rural folk
benefit from them.
We do not have regular annual series of production output of the activities according to rural-
urban division. The CSO has made available such a division for the years 1970 − 71, 1980 − 81
and 1993 − 94 but only at current prices and for net domestic product. With the help of these
figures, we gather some broad idea about the shift in activities. From the perusal of these
statistics, one would notice that in 1970 − 71 only 62.5 per cent net domestic product was
generated in the rural area where more than 80 per cent population resided (and worked) while
in the urban area population residing (and working) was less, 20 per cent, the net domestic
product generated was 37.5 per cent.
Thus, per capita net domestic product in the urban area was 2.45 times that in the rural area.
When we look at the data for 1993 − 94, we gather that while population proportion in rural
area has reduced by about 6.7 per cent points, its contribution to net domestic product has
reduced by 8.6 per cent points but just the reverse could be said to be the case with the urban
area. But the loss of 6.7 points in 80.2 points is not the same as gain of 6.7 points in 19.8 points.
Therefore, net accretions to the two areas on per capita basis show that per capita net domestic
product in the urban area is 2.39 times that in the rural area. Though this ratio is not
deteriorating over time, it is high enough to make people move to urban areas even if
unemployment rate is somewhat higher in urban areas.
Division between Public Sector and Private Sector
Ever since there has been the state, there has been public sector. But the presence of public
sector in production, beyond public administration and control, was very little before
Independence. It has been increasing over time as we pursued a policy of state intervention in
various sectors for variety of reasons. There is not one broad sector of economic activities where
public sector is altogether absent. We have firm data on contribution of public sector in different
production sectors since1960 − 61. A cursory look suggests that the importance of public sector
had been on increase with the passage of time in practically all sectors. The share of public
sector, which was barely 9 per cent even in 1960 − 61, has increased close to 27 per cent though
of late the speed of rise has slackened.
Public administration is purely a public sector activity and in fishing, it has just shown its
presence. In agriculture its presence has increased but it predominantly seems to be irrigation
as this activity is accounted for within the sector of agriculture. Its contribution in forestry and
logging sector is drastically reducing. Most of the mining activity is under public sector and it is
now around 80 per cent. Even in the sector of manufacturing its share has gradually increased
from around 7 per cent in 1960 − 61 to around 20 per cent in 1998 − 99. The share in
construction activity has increased from less than 5 per cent in 1960 − 61 to almost 16 per cent
in 1998 − 99.
It is in trade that public sector has withdrawn since 1980 − 81 when it participated to an extent
of 8.5 per cent. Its role in transport has also plummeted to some extent yet it plays a great role.
The railways are completely with the Government of India. In road transport, state corporations
play a significant role at least in passenger transport. In financial sector too, the presence of
public sector rose significantly; it rose from 6.5 per cent in 1960 − 61 to 17 per cent thanks due
to nationalisation of 14 major banks. A further dose of nationalisation in 1975 − 76 led to its
further rise to 27 per cent by 1980 − 81. Even 6.5 per cent in 1960 − 61 should owe a great deal
to the nationalisation of Imperial Bank as the State Bank of India.
Division between Organised and Unorganised Sectors
Organised sector includes all public sector establishments and private sector establishments
registered under one or the other act, such as Company Act, Factory Act, Societies Act or
Cooperative Act, etc. They are supposed to maintain accounts. Net domestic product was found
divided between organised sector and unorganised sector in 25: 75 ratio in 1960 − 61. With
passage of time, the proportion of organised sector went on increasing, with some fluctuation,
and reached around 30 per cent by 1980 − 81. Since then, its share has been rising and it is
expected to be around 40 per cent by the close of the century. Within organized sector,
manufacturing accounts for 40 per cent and community and personal services, 30 per cent
while trade and finance may account for 25 per cent.
Industrial Structure of Employment
All able-bodied persons should work. Children should not be allowed to work. Old, sick and
infirm should not be permitted to work. Even if production is almost mechanised, there is a man
behind the machine. People who are employed and people who employ as well as people who
are self-employed are all treated as workers. Their numerical strength is known as work force.
People who are willing to work at the prevailing wage rate but are not employed, are treated as
unemployed. Despite the general feeling that a large number of people are unemployed, the
percentage of people who are unemployed is not very large (However, in the composition of the
unemployed, a large number comes from the educated lot). The reason is that poor people
cannot afford to be unemployed.
They work on somebody else's farm, shop or factory or engage themselves in some or the other
activity on their own account. We should, however, remember that statistics used by us do not
include people engaged in activities carried out in homes and hearths by the members of the
family/household. The proportion of people working in total population in our country is
around 40 per cent. This proportion is higher in the case of male members and those living in
villages. There is a variety of ways in which employment data is presented. One classification is
sectoral (or industrial) and the other is occupational. They are made for each of basic four
categories, viz. rural male, rural female, urban male and urban female. Employment data is
available from the census as well as the NSS. The census data for 2001 is not yet available in as
much detail as we need them in this chapter. We opt for the NSS data. However, comparable
NSS data is available from 1972 − 73 only at an interval of five years.
