Indian Economy’s Shift from Agriculture to Services

The Transformation Has Positive and Negative Implications

Newsreel Asia Insight #184
April 7, 2024

India, traditionally an agrarian nation, has seen a significant shift in its economic structure. While agriculture once employed the majority of the workforce and contributed substantially to the Gross Value Added (GVA, or the value of goods and services produced), its economic significance has diminished over time, according to a data report, which shows that, in contrast, the services sector has expanded significantly. This shift has both positive and negative implications for the country and its people.

In the 1970s, agriculture was the dominant sector, contributing 40% to the GVA, but, now, it accounts for less than a fifth of the economic output, according to the report by Data for India. However, the reduction in agricultural employment has not been as rapid as its economic contribution, it says.

This means a large portion of the workforce in agriculture generates only a small fraction of the economic value, whereas the services sector, employing a third of the workforce, contributes nearly half of the national economic value.

The expected transition from agriculture to industry, and then to services, has not fully materialised in India, the report points out, adding that while early industrialisers in Europe, North America, Japan and East Asia followed this path, India and similar economies experienced an early shift to services.

The services sector now dominates India’s economy thanks to the components like real estate, financial services and professional services (including IT and legal services), the report explains. These sectors, despite employing a small percentage of the workforce, contribute significantly to the economy.

The transition from agriculture to services in India carries both beneficial and adverse effects for the nation and its citizens.

The services sector – including IT, financial services and professional services – has been a typically offers higher productivity and wages compared to agriculture, contributing to increased national income and improved living standards. The growth of the services sector, therefore, has created numerous employment opportunities, particularly in urban areas. This has led to a rise in white-collar jobs, which often provide better working conditions and higher salaries than traditional agricultural work.

Further, the expansion of the services sector, especially IT and ITES (Information Technology Enabled Services), has integrated India more closely with the global economy, attracting foreign investment and boosting exports.

However, as the services sector is predominantly urban-centric, the rural population, which relies heavily on agriculture, may not benefit equally from this economic shift. This can deepen the rural-urban divide, leading to social and economic disparities.

Despite the decline in agriculture’s share of employment, a significant portion of India’s population still depends on it for livelihood. The slow growth in manufacturing and industry has not created enough jobs to absorb the workforce moving away from agriculture, leading to underemployment and unemployment issues.

The rapid growth of the services sector requires a workforce with specialised skills, such as technical expertise in IT and financial services. There is a skill gap in the labour market, with many workers lacking the education and training needed for these new jobs.

Further, over-reliance on the services sector, particularly IT and outsourcing, can make the economy vulnerable to global market fluctuations and changes in foreign policies affecting trade and outsourcing.

To ensure the economic shift benefits everyone, it's important to tackle existing problems with comprehensive development plans.

Enhancing the efficiency and output of the agricultural sector, for example, through modern farming techniques, better irrigation systems and improved seed quality, can lead to higher incomes for farmers and reduce rural poverty.

Developing the manufacturing sector, like encouraging the production of goods ranging from textiles to electronics, can create jobs for those leaving agriculture, helping to balance the economic shift and reduce dependency on the services sector.

Providing education and training in areas like technology, management and services can equip the workforce with the skills needed for the jobs created by the new economic realities. For instance, vocational training programs in software development or financial analysis can prepare individuals for high-demand roles in the services sector.