Chapter Notes

SECTORS OF ECONOMIC ACTIVITIES

When we look at the economy, we see people engaged in many different activities. Some produce goods, while others provide services. To better understand these activities, we can group them into categories called sectors. This classification is usually based on an important criterion, like the nature of the work being done.

Primary Sector

This sector includes activities that directly use natural resources. It forms the base for all other products we make.

• Definition: When we produce a good by exploiting natural resources, it is an activity of the primary sector.
• Dependence on Nature: These activities depend mainly on natural factors like rainfall, climate, and the biological processes of animals.
• Also Known As: Because most of the products come from agriculture, dairy, fishing, and forestry, this sector is also called the agriculture and related sector.

Secondary Sector

This sector involves the transformation of natural products into other forms through manufacturing. It is the next step after the primary sector.

• Definition: The secondary sector covers activities in which natural products are changed into other forms through ways of manufacturing.
• Process: The product is not produced by nature but has to be made, so some form of manufacturing in a factory, workshop, or at home is essential.
• Also Known As: Since this sector is associated with different kinds of industries, it is also called the industrial sector.

Tertiary Sector

This sector includes activities that support the development of the primary and secondary sectors. They do not produce goods themselves but provide essential services.

• Definition: The tertiary sector consists of activities that help in the development of the primary and secondary sectors. They generate services rather than goods.
• Role: These activities are an aid or a support for the production process.
• Also Known As: Because it generates services, the tertiary sector is also called the service sector.

COMPARING THE THREE SECTORS

The three sectors produce a vast number of goods and services and employ many people. To understand their contribution, we need to measure how much is produced and how many people work in each sector.

How do we count the total production in each sector?

It is impossible to simply add up the number of cars, computers, and coconuts produced. To solve this, economists suggest using the monetary value of the goods and services.

• Method: Instead of adding up the physical quantity of items, we calculate their value.
• Final Goods and Services: It is crucial to count only the value of final goods and services. These are the goods that ultimately reach the consumers.
• Intermediate Goods: Goods like wheat or flour, which are used up in producing final goods (like biscuits), are called intermediate goods. Their value is already included in the value of the final good. Counting them separately would lead to counting the same value multiple times.

Gross Domestic Product (GDP)

The sum of production from all three sectors gives us the Gross Domestic Product of a country.

• Definition: Gross Domestic Product (GDP) is the value of all final goods and services produced within a country during a particular year.
• Significance: GDP indicates the size of a country's economy. In India, this massive task of measuring GDP is undertaken by a central government ministry.

Historical Change in Sectors

The history of developed countries shows a common pattern of shifts in the importance of sectors as development progresses.

1. Initial Stage: At the beginning of development, the primary sector was the most important sector for both production and employment. Most goods produced were natural products, and most people worked in agriculture.
2. Shift to Secondary: Over time, with new manufacturing methods and the rise of factories, the secondary sector gradually became the most important. Many people moved from farms to work in factories, and factory-produced goods became more common.
3. Shift to Tertiary: In the last 100 years in developed countries, there has been a further shift from the secondary to the tertiary sector. The service sector is now the most important in terms of total production, and it also employs the most people.

PRIMARY, SECONDARY AND TERTIARY SECTORS IN INDIA

Over the last forty years (between 1977-78 and 2017-18), India has also seen significant changes in the contribution of its economic sectors.

Rising Importance of the Tertiary Sector in Production

While production in all three sectors has increased, the growth has been most significant in the tertiary sector.

• Shift in Production: In 2017-18, the tertiary sector emerged as the largest producing sector in India, replacing the primary sector, which was the largest in 1977-78.

There are several reasons for the growing importance of the service sector in India:

• Basic Services: Every country requires basic services like hospitals, schools, police stations, courts, banks, and transport, which are often the responsibility of the government in a developing country.
• Support Services: The development of the primary and secondary sectors creates a greater demand for services like transport, trade, and storage.
• Rising Incomes: As income levels rise, people demand more services like tourism, shopping, private schools, and professional training, especially in big cities.
• New Technology Services: In the last decade, new services based on information and communication technology have become essential and have grown rapidly.

Where are most of the people employed?

A remarkable fact about India is that the shift in employment has not matched the shift in production (GVA).

• Employment Trend: The primary sector continues to be the largest employer, with more than half of the workers in the country engaged in it, mainly in agriculture. In contrast, the secondary and tertiary sectors, which produce most of the GVA, employ less than half the people.
• The Problem: This mismatch occurred because not enough jobs were created in the secondary and tertiary sectors. While industrial production went up by more than nine times, employment in the industry only went up by around three times. A similar trend was seen in the service sector.

This leads to a situation where workers in the agricultural sector are underemployed.

Underemployment

This means there are more people working in agriculture than is necessary. Even if some people are moved out, production will not be affected.

• Definition: Underemployment is a situation where people are apparently working, but all of them are made to work less than their potential.
• Also Known As: Because this type of unemployment is not obvious to an observer, it is also called disguised unemployment.

Underemployment also exists in urban areas, where casual workers like painters or plumbers don't find work every day, or street vendors spend the whole day earning very little.

How to Create More Employment?

Given the significant underemployment in agriculture, creating more jobs is a major challenge. Here are some ways to increase employment:

• Investing in Rural Infrastructure: The government can invest in infrastructure like dams and canals for irrigation. This allows farmers to grow a second crop, creating more work on their own farms. Better rural roads and storage facilities can also create jobs in transport and trade.
• Providing Cheap Credit: If farmers can get loans from banks at a reasonable interest rate, they can afford to buy seeds, fertilisers, and equipment, which improves their farming and creates more productive employment.
• Promoting Rural Industries and Services: The government can identify, promote, and locate industries and services in semi-rural areas. This could include setting up dal mills, cold storage facilities, or honey collection centres. This provides employment to local people without them having to move to large urban centres.
• Investing in Social Services: There is huge potential for job creation in sectors like education and health. A study by the erstwhile Planning Commission (now NITI Aayog) estimated that nearly 20 lakh jobs could be created in the education sector alone. Improving tourism could create jobs for over 35 lakh people annually.
• Short-Term Measures (Right to Work): The government implemented the Mahatma Gandhi National Rural Employment Guarantee Act 2005 (MGNREGA 2005). This law guarantees 100 days of employment in a year to all those in rural areas who are able to work and are in need of it. If the government fails to provide employment, it must pay unemployment allowances.

DIVISION OF SECTORS AS ORGANISED AND UNORGANISED

Another way to classify economic activities is based on employment conditions and whether rules and regulations are followed.

Organised Sector

This sector includes enterprises where the terms of employment are regular and people have assured work.

• Characteristics:
  • Registered by the government and must follow laws like the Factories Act and Minimum Wages Act.
  • Has formal processes and procedures.
  • Offers job security.
  • Workers have fixed working hours and are paid for overtime.
  • Provides benefits like paid leave, provident fund, medical benefits, and pensions.

Unorganised Sector

This sector consists of small, scattered units that are largely outside the control of the government.

• Characteristics:
  • Rules and regulations exist but are not followed.
  • Jobs are low-paid and often not regular.
  • There is no provision for overtime, paid leave, or holidays.
  • Employment is not secure; people can be asked to leave without any reason.

How to Protect Workers in the Unorganised Sector?

While jobs in the organised sector are highly sought-after, they have been expanding very slowly. Many workers are forced into the unorganised sector where they face exploitation, low wages, and job insecurity. Therefore, there is a strong need for their protection and support.

• Vulnerable Groups in Rural Areas: The unorganised sector includes landless agricultural labourers, small and marginal farmers, and artisans. These groups need support with timely delivery of seeds, credit, storage, and marketing facilities.
• Vulnerable Groups in Urban Areas: This includes workers in small-scale industries, casual workers in construction and transport, street vendors, and rag pickers. They need government support for procuring raw materials and marketing their output.
• Social Vulnerability: A majority of workers from scheduled castes, tribes, and backward communities are found in the unorganised sector. In addition to low pay, they often face social discrimination.

SECTORS IN TERMS OF OWNERSHIP: PUBLIC AND PRIVATE SECTORS

A third way to classify economic activities is based on who owns the assets and is responsible for delivering services.

Public Sector

In the public sector, the government owns most of the assets and provides the services.

• Motive: The primary purpose is not to earn profits but to ensure public welfare. The government raises money through taxes to fund these services.
• Examples: Railways, post offices.

Private Sector

In the private sector, ownership of assets and delivery of services is in the hands of private individuals or companies.

• Motive: Activities are guided by the motive to earn profits.
• Examples: Companies like Tata Iron and Steel Company Limited (TISCO) or Reliance Industries Limited (RIL).

Role of the Public Sector

The government must undertake certain activities that the private sector cannot or will not do at a reasonable cost.

• Providing Public Facilities: The government undertakes heavy spending on things like roads, bridges, railways, and electricity generation because they require huge investment and are difficult to charge individual users for.
• Supporting Key Industries: The government may produce and supply essential goods like electricity at subsidised rates to support industries, especially small-scale units. It also supports farmers by buying their crops at a fair price and consumers by selling food grains at a lower price through ration shops.
• Fulfilling Primary Responsibilities: The government has a duty to provide essential services for human development, such as quality education and healthcare, safe drinking water, and housing for the poor.