Dive Deep into the Classification of Industry

Discover why industry classification matters. Explore how it shapes economies, guides policies, and informs strategic decisions in this insightful exploration of industry categorisation.

An industry refers to economic activities that a group conducts to produce goods or services. In this blog, we will explore the classification of industry and look into some interesting examples and stats. So buckle up and get ready to expand your knowledge about how industries are classified. 

Classification of Industry: Raw Materials, Size, Ownership, and Type

Industries play a vital role in the economy, contributing to the production of goods and services. We can better understand their role and impact by classifying them based on raw materials, size, ownership, and type. All the diverse classifications of industry contribute to employment generation, technological advancements, and overall development. Let’s explore the categorisations with examples. 

Industry Classification Based on Raw Materials

One way is to see how industries are classified on the basis of raw materials. 

Agro-based industries rely on agricultural products like crops and livestock. These industries transform plant and animal-based resources, from cotton textiles to dairy products, into goods. They contribute to rural development and income generation. Typical examples here include processing units for rice and pulses, fertiliser manufacturing, and similar. This sector is the main livelihood source to 55% of the Indian population, according to IBEF. 

On the other hand, mineral-based industries, such as iron and steel, aluminium, and cement, utilise mineral ores as their primary raw materials. These industries use mineral ores as their primary raw materials and provide essential inputs to other sectors. In India, iron and steel industry dominate the mining sector (EY) as the country ranks third in global energy consumption. 

Marine-based industries, like sea-food processing or fish oil manufacturing, derive their resources from the sea. They support coastal communities and contribute to the economy. 

And lastly, we have forest-based industries that depend on materials sourced from forests, such as pulp and paper, pharmaceuticals, furniture, and construction industries. These industries are part of sustainable forestry practices and conservation efforts.

Industry Classification Based on Size 

Industries can also be classified based on their size. This categorisation takes into account the amount of capital invested, the number of employees, and the volume of production. For instance, according to the Industries (Development and Regulation) Act, 1951, the investment for a medium scale business cannot exceed more than INR 10 crores.  The investment for a small scale enterprise cannot go beyond INR 5 crores. 

Small-scale industries operate on a smaller scale (no surprises there) in terms of capital, technology, and labour force size. These industries are often owned and run by individuals and employ relatively few workers. Think of basket weaving, handicraft, artisans, etc.  According to Indifi Technologies, 95% of the industrial units in India fall under this category, employing over 175 lakh individuals. And according to Clear Tax, the Make in India initiative comprises this industry classification.  

On the other hand, large scale industries are like that over-enthusiastic party host who invites everyone. They employ many labourers and require substantial capital and advanced technologies to function smoothly. Automobiles and heavy machinery typically fall under this industry classification,

Between these two classifications, you have medium-scale industries. Here the average number of workers are between 20 and 1000. The common examples in India include cement plants, automotive lubricants, etc. 

Industry Classification Based on Ownership

Industries can also be classified based on ownership. 

Public-sector industries are owned and operated by the government, while individuals or corporations own private sector industries. Hindustan Aeronautics Limited (HAL) comes under the public sector industry, while ITC Limited and Tata Consultancy Services come under the private sector. 

Then, we have the joint sector industries where the government and private entities have a stake in the enterprise. Think of Avantika Gas Limited, Oil India Limited, etc.  

And those that do not fall into any of the above, are known to be under the cooperative sector. A group of individuals operates them. One common name in this category is Amul. 

Industry Classification Based on Type

Another way of classifying industries is based on their type. They are classified according to primary, secondary, tertiary, and quaternary. Now, this classification system is helpful in understanding the nature and scope of different industries and their roles in the economy.

Primary industries are industries that use extraction of minerals or natural resources directly from the earth, such as agriculture, mining, fishing, and forestry to create finished products. 

Secondary industries are where activities or manufacturing convert raw materials obtained from the primary industries. These deal with production to provide consumer goods. The textile industry or the leather industry are common examples of this sector.  

Tertiary industries, on the other hand, are those that provide services to individuals and businesses, such as transportation, healthcare, banking, advertising, and retail trade. 

Finally, quaternary industries involve the creation and management of information and knowledge-based services, such as scientific research, education, and software development. 

Importance of Industry Classification

Industry classification helps us make sense of the countless sectors and activities that exist, bringing some order to the chaos.

So, why is industry classification important, you ask? Well, let me break it down for you.

Insights on Economic Structure

Firstly, industry classification allows us to understand and analyse the economy’s structure. We gain insights into the sectors contributing to a country’s overall growth and development by categorising industries based on their characteristics, such as production methods and products. 

Formulation of Economic Policies

Secondly, industry classification aids in the formulation of economic policies and planning. When policymakers have a clear understanding of how industries are categorised and their respective contributions to the economy, they can make more informed decisions to promote growth, create job opportunities, and foster innovation. 

Benchmarking for Strategic Decisions

Additionally, industry classification helps in comparative analysis and benchmarking. By grouping similar industries together, we can compare their performance, identify trends, and learn from best practices. This enables businesses to stay competitive and make strategic decisions based on analysing relevant industries.

Challenges in Industrial Classification

Despite the usefulness of industry classification, there are certain challenges involved. 

Overlapping Categories 

Industries often have characteristics that can fit into multiple categories simultaneously. For example, an industry might utilize both agricultural and mineral resources in its production process. This overlapping nature makes it difficult to assign a specific category, leading to ambiguity in classification.

Complex Structures

Many industries have intricate supply chains and interdependencies, making it challenging to clearly define their boundaries. This complexity can hinder the accurate categorisation of industries, particularly when individual firms operate across multiple sectors.

Emerging Industries

Identifying and classifying newly emerging industries can be challenging due to limited data availability and a lack of established criteria. These industries often operate on the fringes of traditional sectors, making it difficult to assign them to a specific category.

Parting Thoughts

These different classifications empower us to navigate the complexities of industries. They foster informed decision-making and innovation as we continue to evolve in the ever-changing landscape of global economics.