Chapter IV Structural Change with Special Reference to Tertiary Sector in India

Chapter IV Structural 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. I Tertiary 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. 80

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 81

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 Sector Primary Secondary Tertiary United Kingdom 1 26 73 United States 1 22 77 France 2 21 77 Japan 2 30 68 Germany 1 30 69 Italy 2 27 71 Australia 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 82

productivity and income levels. Table 4.2: Percentage sectoral shares in employment of selected developed countries in the year 2006 Country Sector Primary Secondary Tertiary United Kingdom 1 21 78 United States 1 20 79 France 3 24 73 Japan 5 27 68 Germany 2 29 69 Italy 4 28 68 Australia 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 83

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 Sector Primary Secondary Tertiary 1960 2006 1960 2006 1960 2006 China Indonesia Thailand Philippines Malaysia Republic of Korea Pakistan India 30 50 40 26 36 37 46 55 12 12 10 14 08 03 20 22 49 25 19 28 18 20 16 16 47 42 46 33 52 40 27 24 21 25 41 46 46 43 38 29 41 46 44 53 40 57 53 54 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 Sector Primary Secondary Tertiary 1960 2006 1960 2006 1960 2006 84

China Indonesia Thailand Philippines Malaysia Republic of Korea Pakistan India 69 75 84 61 63 66 61 74 43 42 42 35 14 08 53 53 18 08 04 15 12 09 18 11 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 overtime, 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 25 18 21 14 31 25 18 19 13 17 12 24 25 25 21 15 32 40 37 51 55 67 29 28

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. II Tertiary 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 86

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 87

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 Primary Secondary Tertiary Rs. Rs. Rs. Percent Percent Percent Crore Crore Crore GDP 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. 88

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. 89

Table 4.6: Percentage annual growth rate of GDP of different sectors in India at 1999-2000 prices Year GDP Sector Primary Secondary Tertiary 1950-51 to 1960-61 4.67 3.57 8.33 5.06 1960-61 to 1970-71 4.37 2.63 7.21 5.91 1970-71 to 1980-81 3.54 1.77 4.63 5.35 1980-81 to 1990-91 6.88 4.44 7.81 8.95 1990-91 to 2000-01 7.21 3.23 7.40 10.27 2000-01 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 90

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 Year Primary Sector Secondary Sector Trade, Hotels, Transport and Communication Tertiary Sub-Sectors Finance, Insurance, Real Estate and Business Services Public Adm., Defence and other Services Gross Domestic Product at Factor Cost 1950-51 56.84 13.62 11.30 07.67 10.57 100 1960-61 52.69 17.00 13.00 07.00 10.31 100 1970-71 45.95 20.50 14.72 06.82 12.01 100 1980-81 39.93 22.03 17.45 07.49 13.10 100 1990-91 34.04 23.24 18.34 10.58 13.80 100 2000-01 26.17 23.51 22.29 13.05 14.98 100 2006-07 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 91

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 prices Year Trade, hotels, transport and communication Sub-sectors of tertiary sector Financing, insurance, real estate and business services Public administration, defence and other services 1950-51 to 1960-61 6.88 3.40 4.31 1960-61 to 1970-71 6.28 3.99 6.74 1970-71 to 1980-81 6.04 4.87 4.77 1980-81 to 1990-91 7.75 13.86 7.76 1990-91 to 2000-01 10.09 11.19 8.70 2000-01 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. 92

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 longterm 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 93

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 Demand 1 Primary 20.69-5.13 98.74-14.30 2 Secondary -167.03-59.57 830.11-503.52 3 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 State and Union Sr.No. 1993-94 2000-01 2004-05 Territories PCI PCI PCI Primary Secondary Tertiary Primary Secondary Tertiary Primary Secondary Tertiary Value Rank Value Rank Value Rank 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 51.62 2 Assam 5715 21 48.04 13.36 38.60 5943 20 42.43 13.13 44.44 6721 22 36.91 13.58 49.51 3 Bihar 3037 24 51.50 8.59 39.91 3831 24 46.34 8.56 45.10 3773 24 42.55 9.96 47.49 4 Chattisgarh 6539 18 42.08 27.31 30.61 6423 19 34.71 22.90 42.39 8266 17 33.16 26.09 40.75 5 Delhi 18166 1 4.19 24.88 70.93 26523 1 1.46 22.12 76.42 31345 1 1.05 19.06 79.89 6 Goa 16558 2 21.46 31.85 46.69 25710 2 12.30 37.80 49.90 24797 3 15.89 33.59 50.52 7 Gujarat 9796 7 26.88 33.29 39.83 14289 4 18.28 33.74 47.98 16878 5 20.06 34.66 45.28 8 Haryana 11079 6 42.82 25.39 31.79 13848 6 33.05 25.37 41.58 16872 6 28.05 24.98 46.97 9 Himachal Pradesh 7870 10 35.99 25.29 38.72 11085 9 24.78 33.50 41.72 13471 10 23.98 34.90 41.12 10 Jammu & Kashmir 6543 17 37.52 17.59 44.89 7385 16 36.99 11.98 51.03 8075 19 36.73 11.36 51.90 11 Jharkhand 5897 20 41.88 28.84 29.28 6569 18 41.90 29.92 28.18 8025 20 39.37 32.61 28.02 12 Karnataka 7838 11 38.09 23.99 37.92 11854 8 32.31 22.05 45.64 13820 9 20.27 24.99 54.74 13 Kerala 7983 9 32.24 20.31 47.45 10714 11 20.15 20.67 59.18 13321 11 16.60 18.69 64.71 14 Madhya Pradesh 6584 16 45.70 18.6 35.70 7195 17 31.44 27.02 41.54 8238 18 34.50 23.22 42.28 15 Maharashtra 12183 5 21.22 31.15 47.63 14233 5 17.72 25.80 56.48 17864 4 12.80 25.81 61.39 16 Orissa 4896 23 48.58 16.1 35.32 5549 23 38.99 14.64 46.37 7176 21 38.63 15.11 46.26 17 Punjab 12710 4 48.23 19.82 31.95 15071 3 41.96 21.39 36.65 16756 7 38.66 21.46 39.88 18 Rajasthan 6182 19 37.12 23.35 39.53 8175 14 28.25 26.23 45.52 9853 16 29.37 25.75 44.88 19 Tamil Nadu 8955 8 26.24 32.16 41.60 12994 7 18.96 30.83 50.21 13999 8 14.68 26.54 58.78 20 Uttar Pradesh 5066 22 41.74 19.19 39.07 5575 22 37.80 20.25 41.95 6136 23 35.77 19.74 44.49 21 Uttranchal 6896 13 41.18 23.02 35.80 7883 15 39.30 19.13 41.57 10584 14 30.43 24.31 45.26 22 West Bengal 6756 15 35.89 21.31 42.80 5575 21 28.73 20.51 50.76 12271 13 24.19 18.65 57.16 23 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 52.34 24 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 98

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. 99

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. 100

Table 4.11: Percentage sectoral shares in employment of India Year Sector Primary Secondary Tertiary 1950-51 72.10 10.70 17.20 1960-61 71.80 12.20 16.00 1970-71 72.10 11.20 16.70 1980-81 68.80 13.50 17.70 1990-91 66.80 12.70 20.50 2000-01 57.40 16.80 25.80 2006-07 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 101

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 102

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 103

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 Aggregation Year Sector Area Level 1993-94 2004-05 Primary Rural Male 74.80 67.10 Female 86.00 83.50 Total 79.00 73.20 Urban Male 10.30 07.00 Female 25.30 18.30 Total 13.50 9.60 Secondary Rural Male 10.50 14.90 Female 08.00 09.90 Total 09.60 13.20 Urban Male 31.60 33.50 Female 28.40 32.20 Total 31.00 33.30 Tertiary Rural Male 14.70 18.00 Female 05.40 06.60 Total 11.40 13.60 Source: Calculated Urban Male 58.10 59.50 Female 46.30 49.50 Total 55.00 57.10 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 104

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 1 2 3 Source: Calculated Aggregation Level Year 2000-01 2004-05 Trade, Hotels, Transport and Communication Rural Male 67.05 61.10 Female 38.00 43.90 Total 60.53 60.45 Urban Male 65.12 57.66 Female 30.74 27.58 Total 72.88 49.62 Financing, Insurance, Real Estate and Business Services Rural Male 2.31 3.79 Female 0.00 2.62 Total 1.79 1.79 Urban Male 8.80 6.97 Female 5.47 4.36 Total 6.84 7.30 Public Administration, Defence and Other Services Rural Male 30.64 35.11 Female 62.00 53.48 Total 37.66 37.66 Urban Male 26.08 35.37 Female 63.79 68.06 Total 20.26 43.07 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 105

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 106

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. 107

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 2004-05 Primary 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 1.37 2 Assam 1.09 1.46 0.83 0.99 1.03 0.99 0.91 1.15 1.04 3 Bihar 1.03 0.59 1.12 0.93 0.60 1.24 0.86 0.73 1.28 4 Chattisgarh 0.00 0.00 0.00 0.69 1.25 1.37 0.65 1.57 1.25 5 Delhi 0.64 0.61 1.34 1.62 0.56 1.28 0.29 0.63 1.21 6 Goa 0.72 1.42 0.98 0.00 0.00 0.00 0.72 1.44 0.92 7 Gujarat 0.61 1.33 1.28 0.41 1.29 1.66 0.47 1.26 1.51 8 Haryana 1.02 1.20 0.86 0.84 1.21 1.04 0.74 0.97 1.29 9 Himachal Pradesh 0.73 2.05 1.01 0.57 1.84 1.09 0.61 1.30 1.21 10 Jammu & Kashmir 0.83 1.27 1.09 0.97 0.55 1.28 0.94 0.41 1.57 11 Jharkhand - - - 1.11 1.02 0.85 0.88 1.47 0.85 12 Karnataka 0.75 1.22 1.27 0.74 0.89 1.45 0.45 1.23 1.57 13 Kerala 0.77 0.88 1.35 0.57 0.89 1.42 0.56 0.70 1.48 14 Madhya Pradesh 0.83 1.33 1.15 0.66 1.31 1.29 0.71 1.27 1.28 15 Maharashtra 0.46 1.60 1.39 0.41 1.09 1.71 0.29 1.22 1.75 16 Orissa 0.97 0.99 1.04 0.91 0.64 1.36 0.91 0.71 1.27 17 Punjab 1.15 0.98 0.84 1.12 0.79 1.03 1.06 0.83 1.05 18 Rajasthan 0.75 1.17 1.29 0.65 1.05 1.45 0.66 1.03 1.47 19 Tamil Nadu 0.63 1.20 1.32 0.51 0.98 1.59 0.40 0.91 1.74 20 Uttar Pradesh 0.88 1.03 1.16 0.88 0.92 1.12 0.86 0.78 1.35 21 Uttranchal - - - - - - 0.67 1.46 1.19 22 West Bengal 1.01 0.77 1.16 1.02 0.63 1.29 0.72 0.72 1.40 23 North-Eastern States* 0.83 1.22 1.11 0.79 1.37 1.07 0.67 1.67 1.14 24 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 108