Brief note on Tertiarization of the Economy of India

Economic activities are classified into three sectors: primary, secondary, and tertiary. To begin with, most economies are engaged in primary (agricultural) activities. As industrialization takes place the secondary (manufacturing) sector comes to account for the bulk of employment and GDP.

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Post-industrialization, the tertiary (service) sector becomes the major provider of jobs and the main source of GDP and its growth. In India, since the mid 1980s, the service sector has been growing fast.

The tertiary sector currently accounts for the bulk of employment and GDP. Of India’s one billion populations, the workforce is an estimated 400 million. About 58% of the country’s workforce continues to be engaged in agriculture and contributes a mere quarter of GDP.


Nearly 18% is engaged in industry and contributes 26% of GDP. The remaining 23% of the workforce is in the tertiary sector—its proportion is steadily growing—and contributes roughly half of the GDP (Table 1.2). The tertiarization of the economy requires new skills and new work values and, in some cases, new forms of employment and work organization.

Agriculture, which accounts for nearly three-fifths of employment, is expected to grow without any significant increase in employment.

During the 1990s it had zero elasticity of employment and over the coming few decades it may have negative elasticity of employment. Without a major shift in employment from agriculture to other sectors, including rural industries, the majority of India’s working class will remain poor. However, improvement in productivity can be expected to increase wage levels in agriculture. If those displaced from agriculture can have gainful employment in the non-farm sector or rural industries, there can be a significant reduction in poverty.

Employment elasticity in manufacturing is higher than in agriculture but lower than in the service sector (Table 1.3). Global competition and extensive use of modern technologies have reduced and continue to reduce employment intensity in the manufacturing sector.


The stringent provisions in the Industrial Disputes Act, 1947 restraining layoff, plant closure, and retrenchment of labour, introduced during the emergency in 1976 by way of amendments to the said Act, resulted in an increase in capital intensity and decrease in labour intensity. Employment intensity in manufacturing is also declining and there is a virtual stagnation in employment in organized industries.

The service sector holds the prospects of a major share in new job creation, but a substantial part of it is expected to remain unorganized in the foreseeable future. The quality of employment in the unorganized sector is usually poor. Growing global competition has increased casualization and contractualization of labour. Poverty ratios are declining but quality of employment and quality of the labour force remain major areas of concern.

The gradual withdrawal of the welfare state role of the government, policy shifts from labour to investor concerns and the assertion of consumer rights, and the pressures of cost-cutting competition portend persistent jobless growth and worsening of labour market conditions. To counter this trend, it is imperative to invest heavily in basic education and skills training.

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