National income data is a critical tool to understand the structural changes in the Indian economy over the past six decades. The process of India’s economic growth began in earnest with the launch of the First Five Year Plan on April 1, 1951. While the first plan aimed primarily at restoring economic stability, a well-articulated growth strategy was introduced in the Second Five Year Plan.
The subsequent Five Year Plans retained this strategy with necessary modifications to suit evolving economic needs. Early plans focused on building production capacity rather than achieving rapid growth. This planning strategy influenced both the rate and composition of growth.
Significant transformation occurred during the 1980s and 1990s, when India adopted a new strategy of growth that substantially altered its growth trajectory:
Growth rate from 1951–1975: 3.5%
Growth rate from 1975–1990: 5.5%
Growth rate from 1990–2005: 6.5%
Growth rate from 2005–2012: approximately 7%
These changes influenced the entire structure of the Indian economy.
The composition of Gross Domestic Product (GDP) reflects the relative importance of different producing sectors:
In underdeveloped economies, the primary sector (agriculture and allied activities) dominates national income.
As development progresses, the share of the industrial and services sectors increases steadily.
Income elasticity of demand for agricultural products is low, causing demand to stagnate as income rises, while demand for industrial goods and services increases.
On the supply side, agriculture is limited by land availability and subject to diminishing returns.
Industry and services, by contrast, can scale using capital and technology, offering nearly unlimited growth potential through human innovation.
Over the decades, the primary sector’s share in GDP has dropped by 40%, while the secondary and tertiary sectors have increased in contribution.
This trend is likely to continue due to the following:
Reduced restrictions on private sector participation in software development and information services.
Technological advancements and lower capital requirements enabling rapid expansion of services.
Table 1.1 below shows the share and growth rate of the primary, secondary, and tertiary sectors in India’s GDP at constant prices over multiple time periods. It highlights the sectoral structural shifts that have shaped the Indian economy in the post-independence era.
| Period | Primary Share / Growth Rate (%) |
Secondary Share / Growth Rate (%) |
Tertiary Share / Growth Rate (%) |
Total GDP Growth Rate (%) |
|---|---|---|---|---|
| 1950–51 to 1959–60 | 56.0 / 2.3 | 16.0 / 5.7 | 28.0 / 4.1 | 3.7 |
| 1960–61 to 1969–70 | 47.0 / 2.5 | 21.1 / 6.5 | 31.4 / 4.9 | 3.0 |
| 1970–71 to 1979–80 | 42.8 / 1.3 | 22.8 / 3.7 | 34.4 / 4.5 | 3.5 |
| 1980–81 to 1989–90 | 36.4 / 4.4 | 25.0 / 6.8 | 38.6 / 6.6 | 5.4 |
| 1990–91 to 2000–01 | 28.6 / 2.9 | 27.1 / 5.9 | 44.3 / 7.6 | 5.9 |
| 2001–02 to 2007–08 | 22.9 / 3.2 | 20.4 / 6.1 | 56.7 / 8.5 | 7.6 |
| 2008–09 | 17.1 / 2.6 | 18.7 / 4.7 | 64.2 / 9.2 | 6.7 |
| 2009–10 | 20.3 / 1.7 | 25.15 / 8.6 | 54.55 / 8.5 | 8.4 |
| 2010–11 | 14.5 / 6.8 | 27.8 / 7.4 | 57.7 / 8.9 | 8.4 |
| 2011–12 | 13.9 / 1.9 | 27.0 / 4.5 | 59.0 / 9.6 | 7.1 |
Note: Till 1999–2000 at 1993–94 prices; thereafter at 1999–2000 prices.
The secondary and tertiary sectors have consistently grown at more than twice the rate of the primary sector. In the early decades, the secondary sector outpaced others, but from the 1990s onwards, the tertiary sector became the dominant growth engine.
During the 1980s, all sectors saw higher growth, with secondary sector leading. Later, the tertiary sector took the lead, partly because of:
Outsourcing of non-core activities by manufacturers showing up as services growth.
Services as a residual category in National Accounts, possibly including household and cottage industries.
Despite classification concerns, the tertiary sector has clearly become the growth-driver of the Indian economy. Currently, about two-thirds of incremental GDP growth is attributed to services.
India's structural transformation deviates from the Western and Southeast Asian development pattern. Unlike those countries, India experienced a premature leap into the service economy:
Developed nations first transitioned from primary to secondary sectors, then to tertiary in advanced stages.
This enabled them to shift surplus labour from agriculture to manufacturing.
India’s secondary sector has not grown rapidly enough to absorb its labour force.
Rural poor remain stuck in agriculture or migrate to urban slums due to economic and social pressures.
The rise in services’ share in India’s GDP happened at a much lower per capita income than in advanced economies.
This growth pattern reveals a key development gap: growing poverty and unemployment are linked to the slow growth of manufacturing and construction. More inclusive and job-rich industrial growth is essential to sustain economic development.
The tertiary sector (non-commodity sector) has been expanding much faster than the commodity sector. This reflects an income shift from directly productive activities to circulation-based services. The following are the key causes behind this structural change in India's GDP composition:
Information technology and the knowledge economy: IT has fueled high-productivity services that also support low-productivity activities catering to the masses.
Expansion of infrastructure and social services: Sectors like banking, finance, transport, education, and healthcare have expanded to support both economic needs and social welfare.
Growth of public services: Government involvement in economic planning and production has increased, boosting infrastructure and administrative services.
Demonstration effect and global mobility: Exposure through trade, tourism, and international exchanges has led to rising service demand.
Urbanisation: Rising urban populations demand more infrastructure services like communication, public utilities, and logistics. Urban lifestyles have reshaped consumption patterns.
Tourism: Growing international tourism, aided by media and better facilities, has directly stimulated the service industry.
Outsourcing of industrial functions: As industries outsource tasks like finance, legal, marketing, and accounting, this growth is reflected under services in national accounts.
Favourable international environment: Global demand for Indian services — especially IT and entertainment — has enhanced export potential.
Slow growth of commodity-producing sectors: Primary and secondary sectors have not kept pace due to structural constraints, allowing the tertiary sector to dominate GDP share.
Both domestic and international factors support the continued growth of the services sector in India. These factors enhance employment, raise productivity, and integrate India into global value chains.
As real per capita GDP rises, the demand for services increases disproportionately, reinforcing overall GDP growth.
Producer and government services, which form a major part of intermediate consumption, have strong multiplier effects on real GDP.
Dynamic service sub-sectors using communication and IT intensively generate rising employment opportunities.
New services like advertising, marketing, and publicity have emerged due to economic growth and provide vital inputs to other sectors.
Efficient service delivery enhances the productivity of both labour and capital, making services a catalytic agent of economic growth.
Knowledge-based services like professional and technical offerings are the fastest-growing globally. India benefits from a strong institutional base and low labour costs.
IT advancements allow separation of production and consumption in services like R&D, accounting, HR, legal, and marketing, enabling remote service exports.
Global transport and communication costs have dropped, and distance is no longer a barrier—India's location no longer affects competitiveness in skill-based services.
India can export value-added services like software and digital content without being a manufacturer of related hardware, bypassing traditional tech constraints.
Declining manufacturing shares in developed economies mean future exports from developing countries will rely more on service efficiency than on raw materials.
Aging populations in developed nations imply sustained global demand for healthcare, financial, and personal services.
In summary, India is uniquely positioned to benefit from shifts in global trade, technology, capital flows, and demographics. A virtuous cycle of higher growth, increased capital inflows, and rising domestic income and savings can further accelerate the growth of India's services sector.
The expansion in the services sector has broad implications for population, employment, and trade prospects of the Indian economy. Key takeaways include:
Rising services share necessitates policies to enhance competition and efficiency to ensure sustainability and strengthen exports, especially in software.
Technological gains in agriculture and industry are shifting employment toward services and increasing real expenditure on value-added services.
The growing sector offers a large untapped tax base, implying long-term fiscal policy potential.
Despite large investments, the services sector faces significant limitations:
Low productivity and service quality continue to prevail despite tech investments.
Key service domains like legal, postal, accountancy, and insurance are government-dominated or not adequately liberalised.
Lack of clear policy direction hinders growth in areas where India has comparative advantage.
Without corrective action, two undesirable outcomes could arise:
Scenario 1: Service sector workers’ real incomes stagnate due to low productivity, leading to economic and social distress.
Scenario 2: Wages exceed productivity due to worker pressure, reducing income and increasing unemployment for others.
For sustainable, broad-based growth, India must adopt a comprehensive services policy, similar to existing agricultural and industrial policies:
Current reforms are fragmented and sector-specific, leading to uneven growth and implementation.
Strong interlinkages among services imply that opening one sector alone is ineffective without complementary reforms.
An integrated policy should define a clear sequence and pace of reforms across multiple service areas simultaneously.
Phased liberalisation must be matched with social support policies to absorb surplus labour and prevent unrest.
This comprehensive approach will ensure that services-led growth remains dynamic and inclusive in the long run.