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Lessons in macroeconomics - II

Aug 14, 2008

In the last article, we answered the question related to wide disparities in the living standards of people across different countries and linked it to GDP i.e. the amount of goods and services produced in an economy. In the following paragraphs, we touch upon the key components of GDP and how their contribution to the Indian GDP has changed over the past few decades. As mentioned in the last article, GDP is nothing but the market value of all the goods and services produced within a country in a given period of time. Economists, for the sake of better analysis and ease of understanding, have classified all the goods and services produced within an economy under three main sectors viz. the agriculture sector, the manufacturing sector and the services sector.

Agriculture: It refers to production of agricultural goods through the cultivation of plants and raising of domesticated animals. In a broader sense, it can be the entire range of technologies associated with the production of useful products from plants and animals, including soil cultivation, crop and livestock management, and the activities of processing and marketing.

Manufacturing: It is the use of tools and labor to make things for use or sale. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale. Services: It is the non-material equivalent of a good. A service provision is an economic activity that does not result in ownership, and this is what differentiates it from providing physical goods. It is claimed to be a process that creates benefits by facilitating either a change in customers, a change in their physical possessions, or a change in their intangible assets.

Source: Economic survey. Fig. for 2006-07 are quick estimates

As we can see from the above chart, the percentage of agriculture has declined from 57% in 1951 to 20% in 2007. Its place has been taken by the services sector, which has managed to improve its contribution from 29% to 55% during the same period. Obviously, since agriculture's contribution has declined, it can be concluded that other sectors, mainly services, has been able to grow at a much faster pace than agriculture. The reasons may not be difficult to find. Experts have been crying hoarse over how agriculture yields have failed to improve in India over the past many years. Furthermore, the sector has also been suffering from lack of investments, which in turn has affected its output.

As for the manufacturing sector, after keeping its contribution stagnant in the decade between FY91 and FY01, the sector has shown a sharp improvement by FY07, contributing as much as 25% to the nation's GDP. It should be noted that before liberalization took off in India, manufacturing sector was largely under government control or was a victim of what is popularly known as the 'License Raj'. During this era, there were severe curbs imposed on production by the government and this may be, impacted the growth of the manufacturing sector. This is no longer the case and hence, in the coming years, don't be surprised if the sector accounts for still larger chunk of the nation's GDP.

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