The three-sector theory is an economic theory which divides economies into three

sectors of activity: extraction of raw materials (primary), manufacturing (seco

ndary), and services (tertiary).
Primary Sector
The primary sector of the economy is the sector of an economy making direct use
of natural resources. This includes agriculture, forestry, fishing and mining. I
n contrast, the secondary sector produces manufactured goods, and the tertiary s
ector produces services. The primary sector is usually most important in less-de
veloped countries, and typically less important in industrial countries.
Secondary Sector
The input for secondary sector is generally the output of the primary sector. Th
e main activity involves manufacturing. It manufactures finished goods or goods
which are suitable for use by other businesses, for export, or sale to domestic
consumers. The secondary sector supports both the primary and tertiary sector.
Tertiary Sector
The service sector consists of the parts of the economy, i.e. activities where p
eople offer their knowledge and time to improve productivity, performance, poten
tial, and sustainability, which is termed as affective labor. The basic characte
ristic of this sector is providing intangible goods like production of services
instead of end products. Services (also known as "intangible goods") include att
ention, advice, access, experience, and discussion. The production of informatio
n has long been regarded as a service, but some economists now attribute it to a
fourth sector, the quaternary sector.
The table below shows the contribution to GDP by Primary, Secondary and Tertiary
Services over the period of 60 years.
Services play a central role in the economies of both developed and developing c
ountries. They account for over half of the gross domestic product of all develo
ped economies and constitute the single largest sector in most developing econom
ies. The service sector comprises Trade, Hotels & Restaurants, Construction, Ele
ctricity, Transport, Storage, Communication, Banking, Insurance, Education & Res
earch, Medical & Health, Ownership of Dwellings, Real Estate & Business Services
and Other Services (Business Services, Computer & Related Services, Legal Servi
ces, Real Estate Activities, Renting of Machinery & Equipment and Social & Perso
nal Services).
Factors behind Growth in Service Sector
Main reasons behind the growth of services include rapid urbanization, the expan
sion of the public sector and increased demand for intermediate and final consum
er services. Access to efficient services has become crucial for the productivit
y and competitiveness of the entire economy. The successful growth of the primar
y and secondary activities in the economy is mostly dependent on services offere
d by banking, insurance, trade, commerce, entertainment, maintenance of machiner
y and equipment and numerous other services categorized as tertiary activities.
Some of the main factors behind growth in service sectors are 1. I.T. Revolution: Globalisation has increased the demand for communication, tr
avel and information services. The increase in demand has been filled by the rap
id changes brought about by new information technology. IT sector is the backbon
e of service sector. For the last two decades, India has been occupying a vital
position in the area of Information Technology. India has the largest software s
killed population in the world. The domestic market as well as the international
market has grown substantially.
2. Economic liberalisation: The economic liberalisation of the 1991 has brought
many changes in the Indian scenario. With the Disinvestment and the Privatisatio
n policies the state-owned monopolies in many service areas came to an end and M
ultinationals were permitted to enter the Indian market. In service sectors wher
e government regulation has been eased significantly or is less burdensome such as
communications, insurance, asset management and information technology output has
grown rapidly, with exports of information technology enabled services particul
arly strong. In those infrastructure sectors which have been opened to competiti
on, such as telecoms and civil aviation, the private sector has proven to be ext

remely effective and growth has been phenomenal.

3. Export potential: India is a Potential source for services. There are severa
l services that India offers to various parts of the world like banking, insuran
ce, transportation co data services, accounting services, construction labour, d
esigning, entertainment, education, health services, software services and touri
sm. Tourism and software services are among the major foreign exchange earners o
f the country and that the growth rate is also very high as compared to the othe
r sectors.
4. Market orientation: The changing competitive situation and demand supply posi
tions has forced the manufacturing organisation to shift their philosophy from p
roduction orientation to market orientation. Market is a service function that h
as been added in the organisation. The pressures in the market has further force
d the manufacturing organisations to have marketing research, accounting, auditi
ng, financial management, human resource management and marketing research divis
ions
all of which are services functions.
Services GDP and Gross Capital Formation
As per the new method of India s National Accounts Statistics, the services secto
r accounting for 51.3 per cent of India s gross value added (GVA) at basic prices
(current prices) in 2013-14, grew by 9.1 per cent compared to 6.6 per cent total
GVA growth and 6.9 per cent GDP growth at market prices. Including construction
, a borderline service, the services share is 59.6 per cent and growth is 8.1 pe
r cent.
Interestingly, the services sector has the highest share (54.6 per cent) in the
gross capital formation (GCF) of Rs. 35.4 lakhs in 2013-14. This is owing to the
GCF in real estate, ownership of dwelling and professional services at 20.1 per
cent, though the share has fallen in the last two years, followed by trade and
repair services (10.6 per cent) and public administration and defence (10.6 per
cent) where there is improvement in shares. The growth rate of services GCF at 3
.1 per cent has also been higher than the total GCF growth of 1.4 per cent. In f
act, the positive GCF growth in services led to positive growth in total GCF as
GCF growth in agriculture and industry was negative at - 0.3 per cent and - 0.6
per cent respectively. GCF growth in manufacturing was even more negative at - 5
.4 per cent.

As per the old method of estimating GDP at factor cost (GDP at FC), the services
sector accounting for 57 per cent of GDP grew by 6.8 per cent in 2013-14, margi
nally lower than in 2012-13. This is mainly due to a fall in the growth rate of
the combined category of trade, hotels, and restaurants and transport, storage,
and communications to 3.0 per cent from 5.1 per cent in 2012-13, and in spite of
robust growth of financing, insurance, real estate, and business services at 12
.9 per cent. The somewhat differing results in services growth under the two met
hods are due to conceptual changes of GDP at FC to basic price and adoption of l
atest data sources. There was also drastic decline in services share under the n
ew method. The major change took place in the share of trade, repair, hotels, an
d restaurants from 17.2 per cent in 2012-13 using the old factor cost method to
11.3 per cent using the new basic price method. This is because trade carried ou
t by manufacturing companies has now been shifted to manufacturing from trade an
d the data on unorganized trade enterprises has been updated with the 2010-11 su
rvey instead of the 1999-2000 survey. However, this sector s growth was much highe
r using the new method than under the old method.
As per the Advance Estimates (AE) in 2014-15, growth of the services sector acce
lerated further to 10.6 per cent as compared to 9.1 per cent in 2013-14. This is
mainly due to growth acceleration in financial, real estate, and professional s
ervices to 13.7 per cent from 7.9 per cent and public administration, defence, a
nd other services to 9.0 per cent from 7.9 per cent in the previous year. There
was also good growth in trade, hotels, transport, communication, and related ser

vices at 8.4 per cent in 2014-15 though it was lower than the 11.1 per cent grow
th in 2013-14.
Source : Ministry of Finance, Govt. of India. (ON951)
Growth Trends of Sub-Sectors of Services in India
The growth pattern in the service sector has not been uniform across all service
s in India. Some services have grown fast in terms of their share in GDP and in
terms of their share in trade and FDI (e.g., software and telecommunications ser
vices). But there are some services, which have grown fast but have not been abl
e to improve their share in international transactions (e.g., health and educati
on) while there are some services that have in fact witnessed a negative growth
and a low share in international transactions. One of the probable reasons for t
his lopsided growth in services is the fact that reforms in India at the sectora
l level have evolved in an ad-hoc way rather than as part of a coherent overall
strategy. The contribution to GDP growth by services sub-sectors has been shown
in the table below FDI in India s Services Sector
The combined FDI share of financial and non-financial services under services se
ctor, construction development, telecommunications, computer hardware and softwa
re, and hotels and tourism can be taken as the best estimate of services FDI, th
ough it could include some non-service elements. This share is 43.7 per cent of
the cumulative FDI equity inflows during the period April 2000- November 2014. I
f the shares of some other services or service-related sectors like trading, inf
ormation and broadcasting, construction (infrastructure) activities, consultancy
services, hospital and diagnostic centres, ports, agriculture services, educati
on, air transport including air freight, and retail trading are included, then t
he total share of cumulative FDI inflows to the services sector would increase t
o 53.8 per cent. In 2013-14, FDI inflows to the services sector (top five sector
s including construction) declined sharply by 37.6 per cent to US$ 6.4 billion,
though overall FDI inflows grew by 8.4 per cent. However, during 2014-15 (April
to November), the FDI inflows to services grew by 105.8 per cent compared to 22.
2 per cent growth in overall FDI inflows. The total FDI inflows to the top five
services in the first eight months of this year are higher than for the whole of
2013-14 owing to major inflows in telecommunications.
India s Services Employment
In the period from 2004-05 to 2009-10, in terms of contribution to total service
s employment growth, the largest contribution was from Retail trade, which accou
nted for almost one fourth of the total services employment growth. Other servic
es that contributed significantly to services employment growth are Land transpo
rt (20.23 per cent) Public administration (12.35 per cent), Education (8.75 per
ssscent), Computer and related activities (7.25 per cent) and Financial intermed
iation (per cent 4.71). Together the top ten service activities contributed to a
bout 93 per cent of total employment growth in the services sector
The pattern of the sectoral share of employment has changed over the last two de
cades with the share of agriculture falling and of industry and services rising
steadily. Services share in employment at 28.5 per cent in 2011-12 is higher tha
n in industry at 24.4 per cent. Among the different services sectors, from 199394 to 2011-12, there was continuous increase isn employment share in trade, hote
ls, and restaurants; transport, storage, and communication; and financial, insur
ance, real estate and business services. Employment share in community, social,
and personal services has fallen continuously except in 2011-12 when there was a
n increase compared to 2009-10 and 2004-05. Employment elasticity has increased
for both services and industry in 2009-10 to 2011-12 compared to 2004-05 to 2009
-10, though industry had relatively higher employment elasticity. Among services
, employment elasticity was the highest in financial, insurance, real estate, and

business services
Service Export

and

transport, storage, and communication .