The disparity between agricultural and non-agricultural per capita GDP in India has widened significantly. Per capita GDP in agriculture rose by just 37.5% over 60 years, while in the non-agricultural sector it surged by over 580%. Consequently, the ratio of non-agricultural to agricultural per capita GDP increased from 0.68 in 1950–51 to 3.60 in 2010–11.
Slower growth in agriculture: The average annual growth rate in agriculture was only 2.38%, compared to 4.83% in the non-agricultural sector during 1950–2011.
Limited labour mobility: Despite income disparities, population remains stuck in agriculture due to entry restrictions in the organised non-agricultural sector, which only absorbs as many as it can sustain at high wages. Agriculture has become a ‘parking lot for the poor’.
This widening gap has several implications:
Public investment in agriculture yields limited growth dividends due to structural inefficiencies and low returns on labour.
Raising rural per capita income requires redeployment of surplus rural labour into more productive sectors like industry and services.
Shifting underemployed rural workers to high-yield areas can significantly raise overall GDP growth.
Higher incomes in both rural and urban sectors can accelerate poverty reduction.
Urbanisation — especially the growth of small towns and cities — must be actively facilitated to support this transition.
A classification of the economy between rural and urban areas is useful to study the organisational set-up of industries, dominant economic activities, and lifestyles of populations residing in these areas.
Information on rural-urban distribution of domestic product comes from various research surveys, including those by the NCAER.
During the last two decades, the rural economy has grown much faster (7.5% per annum) compared to urban (5.6%), driven by strong growth in the rural non-farm sector. Consequently, the rural sector's share of GDP rose from 41% in 1980-81 to an estimated 51% in 2010-11, surpassing the urban sector.
Growth in rural per capita income has been nearly double that of urban India, though from a lower base, indicating that economic reforms are benefiting rural areas.
Another key point is that rural India is no longer predominantly agrarian: while 73.8% of rural GDP came from farming in 1970-71, this declined to 41.6% in 2010-11. Thus, around 60% of rural GDP now comes from the non-farm sector, reflecting rural India’s rise in income levels.
Rural India has also been more resilient to recent economic fluctuations for several reasons:
The government shifted from merely delivering subsidised goods and infrastructure to transferring funds directly to beneficiaries, empowering them and reducing leakages.
Agriculture benefited from positive policies: between 2004-05 and 2011-12, minimum support prices (MSPs) for paddy rose by 40%, and for wheat by 80%, while inflation rose only about 24% in the same period.
The global commodities boom created new agricultural export markets, largely insulating farmers from the global recession's effects.
Farmers saw limited increases in input costs, except for recent higher labour wages, helping maintain surpluses.
Rural areas became significantly better connected to the rest of India through rapid expansion of mobile phones and road networks.
Thousands of farmers benefited from the record Rs. 65,318 crore farm loan waiver.
Another perspective on structural income changes is the organisation of the economy into distinct sectors. The National Accounts Statistics (NAS) categorises the economy into the organised sector, associated with the modern market economy, and the unorganised sector, often referred to as the traditional economy.
The unorganised sector includes all unincorporated enterprises and household industries that do not maintain formal annual accounts or balance sheets.
In recent decades, the organised sector has expanded more rapidly, aided by policies like reduced excise duties and tariffs, signaling increasing modernisation of economic organisation.
However, despite this growth, the unorganised sector still dominates, accounting for about two-thirds of the Net Domestic Product (NDP). This dominance is not limited to agriculture; the unorganised sector is prevalent across many industries except for public administration and defence. A significant transformation here could substantially impact the economy.
Considering India’s recent focus on public sector development, it is important to examine the changing shares of the public and private sectors in GDP. Data from recent years show that the public sector’s share has nearly doubled. The public sector grew at an average annual rate of 6.0%, while the private sector grew at 2.8%. Yet, the private sector continues to dominate with around 75% of GDP, largely due to the sustained importance of agriculture.
The distribution of national income among production factors—land, labour, capital, and enterprise—reveals their contribution to overall output. These factor incomes are typically classified as rent, wages/salaries, interest, and profits.
In India, an additional category called mixed income captures the earnings of the self-employed. Analysis of factor shares from National Accounts Statistics leads to the following insights:
The mixed income of self-employed individuals constitutes roughly 40% of NDP, showing a large portion of the economy is self-run. While agriculture holds the largest share of this mixed income, its portion has significantly decreased over time.
The transport, communication, and trade sector, the second largest for mixed income, has seen its share rise, while the secondary sector’s share has stayed fairly constant.
These trends suggest Indian agriculture is becoming more capitalist, with fewer self-employed workers, whereas transport, communication, and trade are becoming less capital-intensive with more self-employment.
Since 2000-01, mixed income’s share has declined, a worrying trend given the increasing population reliant on it.
Employee compensation, covering wages and salaries, accounts for about 40% of GDP and has generally been rising. Between 2000-01 and 2004-05, it slightly declined, with workers’ wages dropping sharply while salaried employees’ pay rose.
Sector-wise, the primary sector’s share of employee compensation has decreased, indicating mechanisation; the secondary sector’s share remains stable, suggesting limited employment growth; and the tertiary sector’s share has increased, reflecting greater employment orientation.
Since employee compensation forms a large part of NDP, it tends to amplify inflationary pressures, especially due to dearness allowance adjustments, while unorganised sector workers bear the brunt of inflation more severely.
The operating surplus of companies, including both private and public enterprises, has grown from around 12% of GDP in 2000-01 to nearly 16% in 2011-12, driven mainly by rising corporate profits. This rise is linked to low interest rates, tax concessions, and implicit subsidies increasing retained earnings.
Remittances, comprising workers’ remittances, employee compensation, and migrant transfers, currently represent about 3% of India’s GDP. They play a crucial role in economic development by:
During recessions, steady remittance inflows help stabilise household incomes; during economic booms, they fuel consumption or saving, boosting aggregate demand.
The dramatic rise in remittances is attributed to:
In summary, a key structural shift in India’s economy is the rising share of wages and salaries (employee compensation) in NDP. This trend increases vulnerability to inflation and strengthens cost-push inflationary forces, highlighting the need for greater focus on non-inflationary development financing.