Chapter-3

Sectoral Composition of Economic Growth and its

Major Trends in India

This chapter deals with the first objective of the study, that is to
evaluate the sectoral composition of economic growth in the pre and post
reform periods. Indian economy was left in a dormant state at the time of
independence and the beginning of systematic planning helped in
identifying the priorities. During the period of five year plans, the process
of economic growth was slow and gradual with enough fluctuations
attributed to global and domestic factors.

The economy had been in the grip of a low growth rate for a long
period of time, before picking up the growth momentum in the post-reform
period, in which the average annual growth rate was hovering at less than 3
per cent. The proportion of agriculture and allied activities had been the
highest in comparison with the other sectors. Nevertheless, the economic
reforms and the opening up of the economy for the outside world brought in
tremendous change in the behaviour of the macroeconomic variables with
reference to the increase in real output. It clearly earmarked the faster
growth of services sector in comparison with other sectors. It has been

70
reflected in the structural changes in terms of the relative contribution of
various sectors to GDP. It is necessary to look into the changes in the
sectoral composition corresponding to the long-run growth trends of the
economy. Also it is very important to analyse the extent up to which
different macroeconomic determinants influence the economic growth
process. This study holds special importance because the research attempts
by focusing on macro level determinants of economic growth in India have
been very limited and less concentrated.

The year 1991, in which the new economic policy was introduced in
India, is taken as the year of separation of pre and post reform periods. This
objective has been treated in a two-fold manner. The first one looks into the
trends associated with the sectoral growth from 1971 onwards. Second
aspect is related to check the significance of different sectors in the growth
process from the beginning of planning process in India. It is done in the
context of pre and post reform periods, which helps in making a realistic
comparison of the relative importance of different sectors in Indian
economy and changes over time.

3.1 RESEARCH METHODS

The secondary data related to real GDP and the percentage

contribution of different sectors to GDP during the study period is collected
from the official databases of Reserve Bank of India. Various statistical
techniques have been employed to evaluate the changes in the sectoral
composition of economic growth. The time period is taken as 1971 to 2014
which covers the entire planning period. The trend lines have been used to
capture the pattern and direction of change in the sectoral composition of
growth. The regression analysis shows the extent of influence of changes in
the sectoral composition on the growth of real GDP overtime. It is done by

71
dividing the study period into pre and post reform periods. Along with that
the overall effect is also taken for comparative purpose.

3.2 OPERATIONALISATION OF CONSTRUCTS

Some of the important concepts used in connection with sectoral

composition have been operationalised in the context of the present study.
In this connection, the most important concept related to this study is
economic growth. Also the terminology pre-reform period and post-reform
period, need to be clarified since they have been used in the premise of the
reform measures introduced in India in 1991.

3.2.1 Pre and Post Reform Periods

India adopted economic reforms in 1991 under the umbrella of New

Economic Policy. These reforms were mainly introduced through
liberalisation, privatisation and globalisation measures. These measures
aimed at bringing revolutionary changes in the business environment in the
country. It has marked a new era of economic transition in India. The
empirical test shows that this year also marks a very important structural
break in the economic history of India. Therefore, the year 1991 -92 is taken
as the demarcation to split the pre and post reform periods. Therefore, the
period under study encompasses the data up to 1991-92.

3.2.2 Economic Growth

Economic growth refers to the increase in the market value of the

goods and services produced by an economy over a period of time. It
signifies a consistent increase in the real output of an economy in the long

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run. The increase in real output raises the income level of people and in turn
raises the standard of living of people. It can be measured in nominal terms
or in real terms. Nominal income includes inflation whereas real income is
adjusted for inflation. The growth rate is conventionally measured as the
percentage rate of change- increase or decrease- in real gross domestic
product or real GDP.

3.2.3 Sectoral Composition of Economic Growth

The study is carried out in the backdrop of economic growth

encompassing the study period. The economic growth process necessitates
structural changes in an economy. It takes place in the form of changes in
the relative contribution of various sectors to GDP. Therefore, sectoral
composition of economic growth refers to the changes in the output shares
by various sectors over the study period. The structural changes can also be
reflected in the sector wise changes in the employment pattern over a
period. In the study the sectoral composition of economic growth refers to
the changes in the contribution of various sectors to GDP in the pre and
post reform periods.

3.3 RESULTS AND DISCUSSION

This chapter provides a detailed presentation of the results related to

the changes in the sectoral composition over time. It is based on the first
objective and the research questions put forward in relation to it. The results
are discussed in three parts. The first part deals with the division of time
period into pre and post reform periods in the light of the economic reforms
introduced in 1991 and the structural break associated with it. The second
segment throws light on the changes in the sectoral composition of

73
economic growth from 1971 and the peculiar features and trends associated
with it. The third part is related to the changes in the sectoral growth rates
and their impact on overall economic growth.

3.3.1 Division of Time Period and Structural Break in India’s

Growth Path

Economic reforms introduced in India in early 1990s provide a valid

case for analysing the growth pattern of Indian economy, dividing into
different time zone. These reforms have brought about structural changes in
Indian economy. This is the rationale for dividing the time period into pre
and post reform periods based on the economic reforms introduced in India
in 1991. This is supported with many studies identifying a structural break
during the post-reform period (Balakrishnan & Parameswaran, 2007),
(Agarwal & Ghosh, 2015). The results of Chow test, given below, also
confirm the structural break in 1992 in India’s GDP growth path during the
study period.

Table 3.1: Structural Break in India’s Growth

Statistic Coefficient Degrees of freedom p-value
F-statistic 564.2092 Prob. F(4,27) 0.000
Log likelihood ratio 146.4466 Prob. Chi-Square(4) 0.000
Wald Statistic 2256.837 Prob. Chi-Square(4) 0.000

Source: By calculation

Table 3.1 shows the details of Chow Breakpoint Test for the year
1992. The null hypothesis states that there are no breaks at specified
breakpoints. The equation sample covers the period from 1971 to 2014. The
parameter is structurally stable when probability is below 5 per cent level.

74
The result confirms that the p value of F statistic is zero. Therefore, we
reject the null hypothesis which proves that there is a structural break in the
data in the year 1992.

3.3.2 Evaluating the Sectoral Composition of Growth in India

The changes in sectoral composition along with economic growth

offer ample scope of analysing the economic growth process of any
country. It becomes all the more important when the economy starts to
grow at faster rates at some point of time. Also it is very useful when there
are fluctuations in the growth margins achieved. This segment deals with
the first objective of the study, that is to evaluate the changes in the sectoral
composition of economic growth in the pre and post reform periods in
India. It is arranged in two parts as per the research questions raised in this
connection. The first part deals with the changes in the sectoral composition
of growth during the study period, throwing light on the trends and features.
The second part is associated with the extent of influence of different
sectors on the growth levels of GDP. The data analysis is based on the
secondary data obtained from the Planning Commission from 1971-72 to
2013-14.

3.3.2.1 The changes in the sectoral composition of economic

growth: Trends and Peculiar Features

This segment focuses on the pattern of change in terms of the

relative importance of various sectors of the economy. It is captured
through the graphical method taking into account the composition of
sectoral shares to output, GDP growth rate and the rate of growth of

75
sectoral contributions. The graphs clearly demarcate the trend in pre and
post reform periods.

Figure 3.1: Composition of Sectoral Growth in India in the pre and

post reform periods
Source: Planning Commission, (CSO), 2015.

Figure 3.1 depicts the changes in the sectoral composition of GDP

during the pre and post reform periods in India. During the period between
1971 and 1991, the contribution from services and industrial sectors
showed consistent progress. However, the agricultural sector showed
dismal picture with a steep fall in its relative contribution to total GDP.
Also it is noticed that some of the years had witnessed steep fall in the
contribution of agricultural sector. The momentum of growth in services
sector had picked up in early 1980s itself, almost a decade before economic
reforms.

76
 The time period after the reforms witnessed a steep rise in the
contribution of services sector to GDP, following the footsteps of most of
the advanced economies. The industrial sector also showed a stable
performance until the time of global downturn, starting in 2008. It clearly
signals the adverse impact of global recession on India’s manufacturing
sector, affecting the productivity and growth rate. Also it has affected the
growth of exports adversely. It is important to note that the agricultural
sector continued to perform very bad with a consistent fall in its relative
contribution to total GDP during this time.

12

10

6
Percentage

0
1991-92
1993-94
1995-96
1997-98

2001-02
2003-04
2005-06
2007-08
2009-10
2011-12
2013-14
1999-2000
1971-72
1973-74
1975-76
1977-78
1979-80
1981-82
1983-84
1985-86
1987-88
1989-90

-2

-4

-6

Figure 3.2: Economic growth rate in India in the pre and post reform
periods
Source: Planning Commission, (CSO), 2015.

Figure 3.2 depicts the overall rate of economic growth in India in the
pre and post reform periods. The fluctuation in the growth rate of GDP
signifies the unstable growth pattern of the country’s GDP for a long
period. The fluctuations were much higher in the pre-reform period. In
some of the years the growth rate has fallen to negative zones. However,
the post-reform period witnessed a more stable growth rate although there
are some years of fluctuations.

77
 20 Agri-culture & Allied Services - % Growth Rate
(YoY)
Industry - % Growth Rate (YoY)
15
Services - % Growth Rate (YoY)

10

5
Percentage

-5

-10

-15

Figure 3.3: Sectoral Growth Rates in India in the pre and post reform
periods
Source: Planning Commission, (CSO), 2015.

Figure 3.3 shows the pattern of sectoral growth rate of GDP in the
pre and post reform periods. It is quite evident that among all the three
sectors, primary sector growth rate is the one with highest degree of
fluctuation. The growth rate of industrial sector also fluctuates due to
various domestic and global factors. It is evident that the global downturn
has caused serious fall in the contribution and growth rate of industrial
sector. The services sector growth is more consistent than the other two
sectors. In addition to this, it is very clear that the post-reform period
witnessed remarkable progress in the growth rate of services sector.

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 15

10

1991-92

1995-96

2001-02

2005-06

2011-12
1993-94

1997-98

2003-04

2007-08
2009-10

2013-14
1999-2000
1975-76

1979-80

1985-86

1989-90
1971-72
1973-74

1977-78

1981-82
1983-84

1987-88
-5
Agri-culture & Allied Services - % Growth Rate (YoY)

-10 Industry - % Growth Rate (YoY)

Services - % Growth Rate (YoY)

-15 Gross Domestic Product - % Growth Rate (YoY)

Figure 3.4: Sectoral Growth with overall Economic Growth Rates in

India in the pre and post reform periods

Source: Planning Commission, (CSO), 2015.

Figure 3.4 shows the pattern of sectoral growth with overall rate of
GDP growth in the pre and post reform periods. It is quite evident that the
primary sector growth rate is with highest degree of fluctuation and it
affects the overall growth rate of the economy. It clearly spells out that the
two way linkage of agricultural sector, namely supply of raw materials to
other sectors and also the markets for industrial products play a significant
role in influencing the level of overall growth rate of the economy. It is
interesting to see that it continues even during the post-reform era, although
the share of agricultural sector to GDP is on a decline during this time.

79
3.3.2.2 Changes in the Sectoral Shares of Output and their
Impact on Overall Economic Growth in the Pre and Post Reform
Periods

The shift in the relative importance of different sectors is said to

be a sign of fast growing economies like India. Moreover it is inevitable in
the context of the structural transformation, being occurred in India. The
following analysis highlights the impact of various sectors on the overall
growth of the economy. The results of multiple regression analysis is
explained at three levels, taking the time period up to 2014 and then
dividing them into pre and post reform periods keeping 1991 as the dividing
year. The null hypothesis tested is mentioned below.

H01 : The sectoral composition of economic growth doesn’t have any

significant association with economic growth.

Table 3.2 presents the result of multiple regression analysis

pertaining to the overall economic growth and changes in the sectoral share
of output in the pre and post reform periods in India. It shows that the
changes in the sectoral share of output related to all three sectors are
significant at 5 per cent level. The data covers the time period 1971 to 2014.
The real gross domestic product (GDP) is taken as the dependent variable
and the growth rates of agriculture and allied activities, industrial sector and
service sector are taken as the independent variables.

The Adjusted R- squared value shows that 96 per cent of change in

the dependent variable can be explained by the model. The Durbin-Watson
statistics show that there is no multicollinearity since the value is around 2.
The coefficient values show the relative significance of various sectors in
contributing to the GDP growth of the economy. It is evident that every one

80
per cent increase in the allocation to agriculture and allied activities will
increase GDP by 0.37 per cent. Again, every one per cent increase in
industrial allocation will increase GDP by 0.19 per cent. Similarly every
one per cent increase in services sector allocation will increase GDP by
0.61 per cent. The services sector plays a key role in the long-run growth
process in India. However, the results point out the importance of the
growth of other sectors as well and depict why the growth of agricultural
sector acts as the backbone of Indian economy.

Table 3.2: Overall Economic Growth and the changes in the Sectoral
shares of output in India in the Pre and Post Reform Periods

Variable Coefficient Std. Error t-Statistic Probability

C -0.008963 0.002284 -3.923713 0.0002

D (AGRICULTURE) 0.376984 0.014095 26.74548 0.0000
D (INDUSTRY) 0.195568 0.028553 6.849345 0.0000
D (SERVICES) 0.607015 0.040373 15.03525 0.0000

R-squared 0.965071 Mean dependent var 0.048469

Adjusted R-squared 0.963233 S.D. dependent var 0.030491
S.E. of regression 0.005847 Akaike info criterion -7.382584
Sum squared resid 0.001948 Schwarz criterion -7.244166
Log likelihood 229.1688 Hannan-Quinn criter. -7.328337
F-statistic 524.9667 Durbin-Watson stat 2.082992
Prob (F-statistic) 0.000000

Source: By Calculation

Regression equation: GDP= - 0.00 + 0.37AGR + 0.19IND + 0.60SER

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Table 3.3: Overall Economic Growth and the changes in the Sectoral
shares of output in India in the Pre-Reform Period

Variable Coefficient Std. Error t-Statistic Probability

C -0.002562 0.002382 -1.075740 0.2892

D (AGRICULTURE) 0.418748 0.011283 37.11470 0.0000
D (INDUSTRY) 0.159903 0.024428 6.545841 0.0000
D (SERVICES) 0.474848 0.052904 8.975681 0.0000

R-squared 0.984777 Mean dependent var 0.039100

Adjusted R-squared 0.983508 S.D. dependent var 0.032024
S.E. of regression 0.004113 Akaike info criterion -8.054903
Sum squared resid 0.000609 Schwarz criterion -7.886015
Log likelihood 165.0981 Hannan-Quinn criter. -7.993838
F-statistic 776.2606 Durbin-Watson stat 2.091006
Prob(F-statistic) 0.000000

Source: By Calculation

Regression equation: GDP= - 0.00 + 0.41AGR + 0.15IND + 0.47SER

Table 3.3 shows the result of multiple regression analysis pertaining

to the growth in real GDP and the changes in the sectoral shares of output
in the pre-reform period. The results confirm that the changes in the
sectoral shares of output for all three sectors during the pre-reform period
are significant at 5 per cent level. The data covers the time period 1971 to
1991. The real gross domestic product (GDP) is taken as the dependent
variable and the sectoral shares of output from agriculture and allied
activities, industrial sector and service sector are taken as the independent
variables.

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 The Adjusted R-squared value shows that 98 per cent of change in
the dependent variable can be explained by the model. The Durbin-Watson
statistics show that there is no multicollinearity since the value is around 2.
The coefficient values show the relative significance of changes in the
output shares of various sectors in contributing to the GDP growth. It is
clear that every one per cent increase in the allocation to agriculture and
allied activities will increase GDP by 0.41 per cent. Again, every one per
cent increase in industrial allocation will increase GDP by 0.16 per cent.
Similarly every one per cent increase in services sector allocation will
increase GDP by 0.47 per cent. It indicates that services sector’s
contribution is a key aspect in the growth process in India even in the pre-
reform period. However, it is clear that primary sector has played a very
crucial role in the growth process and it has acted as the backbone of Indian
economy.
Table 3.4: Overall Economic Growth and the changes in the Sectoral
shares of output in India in the Post-Reform Period

Variable Coefficient Std. Error t-Statistic Probability

C -0.000773 0.004085 -0.189120 0.8524

D (AGRICULTURE) 0.233907 0.019604 11.93159 0.0000
D (INDUSTRY) 0.270599 0.031976 8.462656 0.0000
D (SERVICES) 0.520235 0.053604 9.705138 0.0000

R-squared 0.965652 Mean dependent var 0.067019

Adjusted R-squared 0.959212 S.D. dependent var 0.016826
S.E. of regression 0.003398 Akaike info criterion -8.354261
Sum squared resid 0.000185 Schwarz criterion -8.155114
Log likelihood 87.54261 Hannan-Quinn criter. -8.315385
F-statistic 149.9394 Durbin-Watson stat 2.070232
Prob (F-statistic) 0.000000

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Source: By Calculation

Regression equation: GDP= -0.00 + 0.23AGR + 0.27IND + 0.52SER

Table 3.4 presents the result of multiple regression analysis

pertaining to the economic growth and the changes in the sectoral shares of
output in the post-reform period. The results confirm that the changes in the
output shares for all three sectors during the post-reform period are
significant at 5 per cent level. The data covers the time period from 1991 to
2014. The real gross domestic product (GDP) is taken as the dependent
variable and the changes in the output share of agriculture and allied
activities, industrial sector and service sector are taken as the independent
variables. The Adjusted R-squared value shows that 95 per cent of change
in the dependent variable can be explained by the model. The coefficient
values show that every one per cent increase in the allocation to agriculture
and allied activities will increase GDP by 0.23 per cent. Again, every one
per cent increase in industrial allocation will increase GDP by 0.27 per cent.
Similarly every one per cent increase in services sector allocation will
increase GDP by 0.52 per cent. It indicates that services sector’s
contribution is a key aspect in the post-reform period. However the primary
and secondary sectors have a special role in enhancing the growth levels in
Indian economy.

The results clearly support the findings of various studies

highlighting the increasing importance of services sector in the economic
growth process in India. While comparing the trends in sectoral
composition of economic growth in the pre-reform period to post-reform
time, the changes in sectoral composition of output is very evident because
it clearly depicts the nature of the structural transformation in the economy.
It is noticeable that the pace of economic growth is much high after the

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introduction of economic reforms in India in 1991. Also the increasing
importance of services sector becomes more and more visible in the overall
economic growth scenario. Three things are very important in the context of
these findings. One, the steady growth momentum achieved by the
economy after 1991 was mainly due to the spurt in the service sector
growth which helped in balancing the overall growth against the
considerable decline in the production of agricultural sector and
fluctuations in the manufacturing sector growth. Two, the faster growth of
the service sector is necessary to sustain the growth in the primary and
secondary sectors. It is due to the inter-linkage between different sectors of
the economy. Third, it is observed that sustaining the growth rate achieved
by the service sector would be a big challenge for the economy in the
coming years.

3.4 CHAPTER SUMMARY

This chapter has highlighted the changes in the sectoral composition

of economic growth in the pre and post reform periods. It is very important
to keep a good understanding of the position of Indian economy before the
introduction of economic reforms in 1991. It is true to say that the economy
was left in a dormant state at the time of independence and the beginning of
systematic planning helped in identifying the priorities. During the period
of five year plans, the process of economic growth was very slow and
gradual with enough fluctuations attributed to various global and domestic
factors. However, the introduction of economic reforms in 1991 has marked
a significant change in the growth history of the economy. The growth of
service sector has started playing a crucial role in the overall economic
growth scenario. The service-sector-led growth has given the status to
Indian economy as ‘one of the fast growing economies’, but it would give
rise to challenges related to retaining the growth rates attained.

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