Basics of National Income Accounting
Economic Territory: Geographical territory administered by a government within which persons, goods and capital circulate freely. Includes:
- Political frontiers including territorial waters & air space.
- Embassies, consulates, military bases, etc. located abroad. (Excluding those located within the political frontiers).
- Ships, aircrafts etc., operated by residents between two or more countries. For ex., Air India’s services between different countries
- Fishing vessels, oil & natural gas rigs and floating platforms operated by residents of the country in the international waters or engaged in extraction in areas where the country has exclusive rights of operation.
Normal Residents’ Vs Indian Citizens
- Normal Resident: Person who ordinarily resides in a country and whose centre of economic interest also lies in that country. Include both nationals (such as Indians living in India) and foreigners (non-nationals living in India).
- Citizens: Include Indian nationals living within India as well as outside India.
GDP vs GNP
- Resident: Economic concept; Person or an institution whose centre of economic interest lies in the economic territory of the country in which he lives.
- Citizens: Legal Concept
- GDP calculation: All Residents (Includes foreign Residents within India & excludes Indian Citizens outside India.)
- GNP Calculation: All the citizens (Includes all Indian Citizens both inside as well as outside India)
Scope of Goods Covered
- Covers all Final Goods; does not cover Intermediate Goods since it leads to double accounting.
- Does not include sale of secondhand Goods; but services offered on such sales considered.
- Includes even those Goods that are not marketed but produced for self-consumption.
- Includes even those Goods that remain unsold; considered as addition to Inventories/ Investment.
Scope of Services Covered
- Covers all services which are produced within the Country.
- Does not include non-marketable services such as household chores, care for elderly etc.
- Exception: Imputed rent of a building that is owned and occupied by owners themselves.
- National Income should consider only the factor incomes i.e., income earned through the provision of factors of production. Hence, transfer payments i.e., old age pensions, education grants, unemployment benefits, gifts not included in the GDP Calculation.
- Similarly, remittances are also not accounted for.
Production vs Product Taxes
- Production Taxes: Taxes paid on land, labour, assets such as Land revenue, stamp duty, Registration fee, Professional tax. Not taxed on per unit of product.
- Product Taxes: Taxes paid on per unit of product such as GST, Excise Duty, Customs duty etc.
Production vs Product Subsidies
- Production Subsidies: Subsidies to the entire enterprise and not specific to product. Examples include Subsidies to Railways, Farmers, Small scale Industries etc.
- Product Subsidies: Product specific subsidies such as Food, LPG, Kerosene, Fertilisers etc.
Factor Cost vs Basic Price vs Market Price
GDP is calculated by considering 3 different prices
- Factor Cost: Cost of factors of Production such as land, Labour & Capital.
- Basic Price (Price expected to be received by Producer): Factor Cost + Production Taxes- Production Subsidies.
- Market Price (Price expected to be paid by consumer): Basic Price+ Product Taxes- Product Subsidies.
- GDP at Market price = GDP at Basic price + Product Taxes- Product Subsidies
- GDP at Market Price = GDP at Factor Cost + Production Taxes + Product Taxes – (Production Subsidies + Product Subsidies)
- GDP at Market price = GDP at Factor Cost + Indirect Taxes – Subsidies
Methods for GDP Calculation
GDP = PFCE + GFCE + GCF + (X-M)
Private Final Consumption Expenditure (PFCE): Expenditure incurred by the households on Goods and Services (only Marketable services).
What does it include?
- Expenditure incurred by Residents within India.
- Expenditure incurred by Residents outside India (Say, Tourism, Education accounted as Imports)
- Expenditure incurred by non-residents within Economic territory of India considered as Exports
Government Final Consumption Expenditure: Compensation of employees (wages and salaries + pensions) + Net purchase of goods and services + Consumption of fixed capital (CFC). Note: Excludes the transfer payment.
Gross Capital Formation (GCF): Calculated as Gross Fixed Capital Formation (GFCF) + Changes in Stocks + Net acquisition of valuables.
Gross Fixed Capital Formation (GFCF) comprises of:
- Construction and Maintenance of fixed assets such Infrastructure such as Dwellings, Roads, Railways etc.
- Machinery and Equipment (3) Intellectual Property Rights such as R&D, Software etc.
- Cultivated biological resources – Increment in Livestock and Plantation.
Exports (X) & Imports (M): Imports need to be subtracted since National Income should consider Goods & Services produced within Economic territory.
GDP By Income Method
Compensation of employees (CE): Total remuneration in cash or in-kind payable by employers to employees for the work done. Direct social transfers such as payments for sickness, educational grants and pensions are also imputed to compensation of employees.
Operating Surplus (OS): Operating surplus for Organised sector: Retained Earnings + Dividend + Interest on Capital
Mixed Income (MI): Mixed Income for Unorganised/ Household sector: Difficult to differentiate between Employment income (Wages) & Profits (Operating Surplus)
Consumption of Fixed Assets: Rent on land, Buildings and other structures
GVA at Basic Prices = (CE+ OS/MI+ CFA) + Production Taxes – Production Subsidies
GDP = GVA at Basic Prices + Product Taxes – Product Subsidies
GDP By Production Method
Gross Value Added (GVA) = Value of Output- Value of Intermediate Consumption.
GDP at Market Price = GDP at basic Price + Product Taxes – Product Subsidies
Nominal GDP Vs Real GDP
Nominal GDP: Refers to GDP at current market prices i.e., the GDP is calculated as per the market prices for the year for which the GDP is calculated.
Real GDP: Refers to GDP at base year prices i.e., GDP is calculated as per market prices in the base year. Thus, the Real GDP negates the inflation in goods and services.
In case of high rate of inflation, nominal GDP would be quite higher than real GDP. However, in case of deflation, real GDP would be higher than nominal GDP.
GDP vs GNP
GNP = GDP + Income earned by Indians outside India – Income earned by Foreigners within India
GNP = GDP + Net Factor Income from abroad (NFIA).
Changes in GDP Estimation
- Change in the base year from 2004-05 to 2011-12.
- Change in the GDP estimation from the GDP at Factor Cost to GDP at Market Prices
- Change in the database for capturing economic activity from RBI’s database to the MCA-21 database of the Ministry of Corporate Affairs. This database is used for two purposes:
- Estimate the production of goods and services in the organised sector based upon the tax returns
- Extrapolate the production of goods and services in the unorganised sector based upon the organised sector activity.
Drivers of Indian Economy
According to Expenditure method, GDP is calculated as C+G+I+ (X-M) where C denotes Private final consumption expenditure (PFCE), G denotes Government Final consumption Expenditure (GFCE), I denotes Investment, X denotes Exports and M denotes Imports. PFCE accounts for the highest contribution followed by Investment.
Table: Share of Sectors in Nominal GDP (per cent)
|Sectors||2019-20(1st RE)||2020-21(PE)||2021-22(1st AE)|
|Gross Fixed Capital Formation||28.8||27.1||29.6|
Trends in India’s GDP & Growth Rates
Both Real GDP and Nominal GDP had registered consistent increases in terms of absolute value before 2020-21. Because of covid-19, both Real GDP and Nominal GDP contracted in 2020-21. However, both Real GDP and Nominal GDP have now come back to pre-COVID levels.
The Real GDP (GDP at base year prices) has increased from 133 lakh crores in 2020-21 to 144 lakh crores in 2021-22. Similarly, the nominal GDP (GDP at current market prices) has increased from 195 lakh crores in 2020-21 to 230 lakh crores in 2021-22.
Both Real GDP & Nominal GDP Growth rate had registered consistent decline before 2020-21. Because of covid-19, both Real GDP & Nominal GDP growth rates contracted in 2020-21. However, both Real GDP & Nominal GDP growth rate have now registered positive growth rates.
Trends in Gross Capital Formation
Gross Capital Formation is calculated as Gross fixed capital formation (GFCF) + Changes in stocks (increase in stocks of inventories) + net acquisition of valuables
- Gross fixed capital formation: Creation of new assets, Machinery and Equipment, R&D and Increment in Cultivated Biological Resources
- Changes in Stock/Inventories: Increase in Inventory value
- Valuables: Valuables include precious metals & stones, antique, other art objects and valuables.
|Trends in Gross Capital Formation (GCF)|
|1. Gross Fixed Capital Formation||Public: 8%||Public: 7.5%||Public: 7%|
|Private: 25%||Private: 21%||Private: 22%|
|2. Change in Stocks||4.5%||2%||1%|
- There has been a decline in GCF in the last decade from 40% to 31%.
- Share of Private Investment is higher than Public Investment.
Trends in Gross Domestic Savings
|Trends in Gross Domestic Savings|
|Private Corporate Sector||10%||12%||10.5%|
- Gross Domestic Savings is contributed by the Household sector, Private Corporate and Public Sector.
- Decline in Gross Domestic Savings in the last decade from 37% to 31.5%.
- The Household Sector contributes the largest share of Savings in India.
- The Household Savings is categorised into:
a) Net Financial Savings
b) Physical Savings
Note: Physical Savings of household sector account for the larger share in comparison to Net Financial Savings)
- Share of the Agriculture sector has remained stagnant around 18%, except in 2020-21, when its share increased to 20%.
- Amongst the sub-sectors in Agriculture, Crops account for the highest share.
- Share of the Industrial Sector has steadily declined in the last decade from 32% to 25%.
- Share of the manufacturing sector has remained stagnant at 16%-17% in the last decade.
- Share of the services sector has increased in the last decade from 49% to 55%.
Contribution of Sectors to India’s GDP
|Table: Sectoral share in Gross Value Added at Current Basic Prices|
|I||Agriculture, forestry & fishing||18.5||18.2||18.6||18.2||17.7||18.0||18.3||17.6||18.4||20.2|
|Forestry and logging||1.5||1.5||1.5||1.5||1.5||1.5||1.4||1.5||1.3||–|
|Fishing and aquaculture||0.8||0.9||0.9||1.0||1.1||1.1||1.2||1.2||1.2||–|
|Mining and quarrying||3.2||3.1||2.9||2.7||2.3||2.3||2.2||2.2||1.9||1.6|
|Electricity, gas, water supply & other utility services||2.3||2.3||2.5||2.5||2.7||2.5||2.7||2.6||2.6||2.7|
|GVA at basic prices||100.0||100.0||100.0||100.0||100.0||100.0||100.0||100.0||100.0||100.0|
Economic Recession in India
- India has faced economic recession in 2020-21 for the first time in the last 41 years since 1979-80
- Recession is defined as a fall in the overall economic activity for two consecutive quarters (six months) accompanied by a decline in income, sales and employment.
- In independent India’s history, 5 such years of negative GDP growth were registered. They saw contraction of -1.2% (FY58), -3.66% (FY66), -0.32% (FY73), -5.2% (FY80) and (2020-21).