An economy comprises of a variety of economic activities resulting in different sources and nature of income. For systematic and reliable accounting of national income, it is essential to classify different types if economic activities and sources of income. It provides conceptual clarity and comprehensiveness to national income estimation. Therefore, the sources and types of national income are classified under different sectors is to make national income accounting systematic and analysis of national income data easy and comprehensive. The groups so formed are generally called ‘sectors’ of the economy. This is called sectoral accounting of national income.

For sectoral classification of economic activities, transactors falling under different sectors are classified on the basis (i) nature of economic activity, also called functional classification, and (ii) the use of the national income. The basis of classification is chosen in accordance with the purpose and method chosen for estimating national income. In mixed economies, economy is often classified as (i) private sector, and (ii) public sector.

(i) Sectoral classification of economy: for the purpose of estimating national income, the CSO uses the following sectoral classification of economy.

(a) Primary sector, including agriculture and allied activities, forestry, fishing, mining and quarrying;

(b) Secondary sector, including manufacturing industries, and

(c) Tertiary sector or service sector, including banking, insurance, transport and communication, trade and commerce.

Depending on the purpose and data availability, these broad sectors of the economy are subclassified under their sub-categories. For the purpose of estimating national income, the broad sectors are further sub-sectors as given below:

I. Primary sector

1. Agriculture,

2. Forestry and logging,

3. Fishing,

4. Mining and quarrying.

II. Secondary sector

1. Manufacturing,

2. Registered manufacturing,

3. Unregistered manufacturing,

4. Construction,

5. Electricity, water and gas supply.

III. Tertiary sector

A. Transport, trade and communication

1. Transport

2. Railways,

3. Other means of transport,

4. Communication,

5. Trade, hotels and restaurants.

B. Finance and real estate

1. Banking and insurance

2. Real estate for residential and business purposes

C. Community and personal services

1. Public administration and defence

2. Other services.

(ii) Methods of measuring national income: it may be noted at the outset that, given the nature of the Indian economy and the paucity of reliable data, it is not possible to use any single method, or to estimate the national income by using each method separately. For example, income method cannot be used for the agricultural sector because of unavailability of reliable data, and income of household enterprises cannot be estimated by the expenditure method. Therefore, a combination of different methods, especially of value added method and income method, is used for estimating national income.

Given the sectoral and sub-sectoral classification of the economy, let us now look at the methods adopted by the CSO for estimating income of the different sectors.

Production method, what is also called net output method or value added method, is used to estimate income or domestic product of the following production sectors.

1. Agricultural and allied services,

2. Forestry and logging,

3. Fishing,

4. Mining and quarrying,

5. Registered manufacturing.

Income method is used for estimating domestic income of the following sectors.

1. Unregistered manufacturing

2. Gas, electricity and water supply

3. Banking and insurance

4. Transportation, communication and storage

5. Real estate, ownership of dwellings and business services

6. Trade, hotels and restaurants

7. Public administration and defence

8. Other services

For the sake of comparison of estimates and to check their reliability, CSO estimates national income also on the basis expenditure method. Under the expenditure method of estimating national income, sectoral division of the economy is based on the use pattern of the national income. In India, the sectoral accounting of GDP, based on the expenditure method, follows the following classification of the national income given below:

1. Private final consumption expenditure including on (a) durable goods, (b) semi durable goods, (c) non-durable goods, and (d) services.

2. Government final consumption expenditure

3. Gross fixed formation including construction, machinery and equipments,

4. Change in stocks, and

5. Net export of goods and services.

What kind of sectoral division of economic activities is made depends on the uses of income and the method chosen for the purpose of estimating national income. Often all the three methods are chosen for the sake of completeness and comparison.

Incidentally, a combination of expenditure method and commodity flow approach is adopted for estimating income generated in the construction sector.

(iii) Methods of measuring national income aggregates: estimating national income more appropriately gross national product is not the end of the story. Once GNP of the country is estimated, it provides the basis of measuring other national income aggregates. The process of generating macroeconomic aggregates other than GNP is shown.

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