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Gross domestic product in India.

GROSS DOMESTIC PRODUCT

Gross domestic product in India the monetary value of all the finished goods and services produced within a country’s borders in a specific time period. Though GDP is usually calculated on an annual basis, it can be calculated with reference to any time frame.

What Does GDP in India Indicate?

GDP in India is commonly used as an indicator of the economic health of a country, as well as a measure of country’s standard of living.

The higher the production of goods and services in an economy, the higher the consumption level of people. A higher consumption level indicates a higher standard of living of the people.

Criticism of GDP | Gross domestic product in India

  1. Critics of GDP argue that it does not take into account the transactions that are illegal and not reported to the government in order to evade taxes.
  2. Others criticize the tendency of GDP to be interpreted as an indicator of well-being, whereas in reality, it serves as a measure of a nation’s productivity. For example, people may not enjoy well-being on account of high pollution in their vicinity.

Calculation of GDP | Gross domestic product in india

There are three primary methods by which GDP can be determined. All, when correctly calculated, should yield the same figure. These three approaches are the expenditure approach, the output (or production) approach, and the income approach.

The expenditure approach measures the total value of all the products used in developing a finished product for sale. For instance, a finished car’s contribution to a nation’s GDP would be measured by the total cost of materials and services that went into the car’s construction.

The production approach is something like the reverse of the expenditure approach. Instead of exclusively measuring the input costs that feed the economic activity, the production approach estimates the total value of economic output and deducts the costs of goods that are consumed in the process, like those of materials and services.

The third approach, the income approach, is an intermediary between the two above-mentioned approaches. It measures GDP by totalling all the domestic income earned by the private as well as government sectors.

India’s Position (December 2016)

In India, GDP is estimated by the Central Statistics Office (CSO). The economy of India is the seventh largest (the United States, China, Japan, Germany, the United Kingdom, France, and India, in the order) economy in the world, measured by nominal GDP ($2.30 trillion) and the third largest (China, the United States, and India, in the order) by purchasing power parity (PPP) ($8.72 trillion).

What Is  Purchasing Power Parity?

Purchasing power parity (PPP) is defined as the number of units of a country’s currency required to buy the same amount of goods and services in the domestic market as one dollar would buy in the US.

PPP is an attempt to work out how much currency will be needed to buy the same quantity of goods and services in different countries. It reflects the underlying exchange rate between the two different countries for buying goods and services, and a more accurate reflection of actual living standards in countries.

Often exchange rates do not actually reflect different living costs because some goods are not easily traded. For example, if you live in the United States, it is irrelevant if there is cheaper accommodation elsewhere in the world. What is relevant to you is the price of goods and services at which they are available to you locally.

For example, let us suppose that the market exchange rate between Dollar and Rupee is 66. One Dollar in the US buys 1 liter of milk. One dollar in terms of rupee, i.e., ₹66 can buy 3 liters of milk in India.

Suppose that India’s GDP is ₹660. If we consider the market exchange rate, then this amount is equal to $10. If milk is the only commodity produced in the world, one will think that India is producing 10 liters of milk considering India’s exchange rate ₹66 and GDP value of ₹660.

However, India produces 30 liters of milk. To overcome this defect, we use the purchasing power parity exchange rate. Under PPP, we measure the GDP of India by comparing the money required to purchase commodities in both the countries. One dollar in the US can purchase one liter of milk, whereas ‘ 21 can purchase one liter of milk in India.

$1 = ₹21

Thus, in our example, PPP exchange rate is ₹21/$. Using this exchange rate, India’s GDP of ₹660 is equal to $30. Thus, India’s GDP in terms of PPP is $30. On the other hand, India’s GDP in terms of market exchange rate is $10.

The World Bank (WB) calculates the PPP exchange rate. As per the WB estimate in the year 2014, ₹17.12 is equal to US$ 1.

Difference Between Nominal GDP and Real GDP

When the GDP is estimated at current prices, it exhibits Nominal GDP, whereas Real GDP is when the estimation is made at constant prices.

Read more : Industrial Policy

Definition of nominal GDP

It is the monetary value of the economic output produced during the current year at current year prices. The point to be noted is that the prices of the current year are taken into consideration without adjusting for inflation.

Current production of goods and services x Current prices = Nominal GDP

Definition of real GDP

GDP measurement is done at fixed prices, i.e. at the prices which were prevalent at some point of time in the past, known as base year price or reference price. It reflects the economic output at constant prices. Real GDP is considered as a true indicator of country’s economic growth because it exclusively considers the rise in production of goods and services as the reason for increase in GDP.

Current Production of goods and services x Base Year Prices Nominal GDP
Economists while calculating growth in GDP consider figures of real GDP.

GDP Growth

What is “economic growth rate”?

An economic growth rate is a measure of economic growth from one period to another in terms of percentage. In practice, it is a measure of the rate of change in a nation’s GDP from one year to another.

The economic growth rate provides insight into the general direction and magnitude of growth for the overall economy. It demonstrates the change in a nation’s or economy’s income over a specified period of time. Most commonly, this is examined on a quarterly basis, but economic growth rates can be observed across larger spans of time, such as year over year (YOY) or decade over decade.

Economic growth refers to positive change in economic output, but changes in economic output can be either positive or negative. If an economy experiences two consecutive quarters with falling growth rates, it can be said that the associated economy is falling into a recession. If the economy begins to shrink, the percentage rate can be expressed in negative to demonstrate the income lost over the time period being examined.

Real economic growth rate

The real economic growth rate measures the economic growth in relation to GDP, from one period to another, adjusted for inflation, in other words, expressed in real as opposed to nominal terms.

The real economic growth rate is expressed as a percentage that shows the rate of change of a country’s GDP from one period to another, typically from one year to the next.

The real economic growth rate, also referred to as the growth rate of real GDP, is a more useful measure than the nominal GDP growth rate due to the fact that it takes into account the growth only due to increase in output (and ignores the contribution of price rise to increase in value of output).

Calculating the real GDP growth rate

GDP is calculated as the sum of consumer spending, business spending, government spending, and the total of exports minus imports. In order to factor in inflation and arrive at the real GDP figure, the calculation is as follows:

GDP

Real GDP = GDP/ (1 + Inflation since base year)

Once real GDP is calculated, the real GDP growth rate is calculated as follows:

Real GDP growth rate = (Most recent year’s real GDP – Previous year’s real GDP) / Previous year’s real GDP x 100 

Base Year

The base year, updated periodically by the government, is a designated year used as a comparison point for economic data such as the GDP. Presently, 2011-12 is used as the base year for calculating GDP in India.

GDP is calculated by taking into account the quantity of the present year and prices of the base year. Thus, when we talk about GDP growth, we talk about real GDP growth rate.

  1. MARKET PRICE AND FACTOR COST

What Is Factor Cost?

A number of inputs are required in the production process. These inputs are commonly known as factors of production and include things such as land, labour, capital, and entrepreneurship. Producers of goods and services incur a cost for using these factors of production. Factor cost refers to the cost of factors of production that is incurred by a firm when producing goods and services. Examples of such production costs include the cost of renting machines, purchasing machinery and land, paying salaries and wages, cost of obtaining capital, and the profit margins that are added by the entrepreneur (profits are the cost of entrepreneur).

The factor cost does not include the taxes that are paid to the government since taxes are not directly involved in the production process and, therefore, are not a part of the direct production cost. However, subsidies received are included in the factor cost as subsidies are direct inputs into the production.

What Is Market Price?

Once goods and services are produced, they are sold at a market price. The market price is the price that consumers will pay for the product when they purchase it from the sellers. Taxes charged by the government will be added onto the factor price while subsidies provided will be reduced from the factor price to arrive at the market price.

Taxes are added because taxes are the costs that increase the price, and subsidies are reduced because subsidies compensate the factor cost or reduce the factor cost. For instance, money is required to run a business. Thus, money is a factor of production. The cost of money is interest. Interest here is a factor cost. If government gives subsidy on interest, then actual cost of money (interest cost) will reduce.

Relationship between GDP at Market Price and GDP at Factor Cost

GDP (MP) – Indirect Taxes + Subsidies = GDP (FC)

Note: In common parlance, when we use the term GDP, we refer to GDP at market prices.

  1. GROSS VALUE ADDED OR GDP (FC)

Gross value added (GVA) is the measure of the value of goods and services produced in an area, industry, or sector of economy.

Relationship to GDP

GVA is linked to GDP, as both are measures of output. The relationship is defined as follows:

GVA + Taxes on products – Subsidies on products = GDP

Why GVA Is Calculated?

  1. GVA and GDP give a picture of economic activity from producers’ (supply side) and consumers’ (demand side) perspective, respectively, because GVA is the net receipt of the producers and GDP is the expenditure incurred by the consumers.
  2. Both these measures need not match and there could be a sharp divergence due to net indirect taxes (NIT = indirect taxes — subsidies), which are counted in GDP calculations (GDP is the sum of GVA and NIT).
  3. GVA provides a better measure of economic activity because GDP can record a sharp increase just on account of increased tax collections due to better compliance/coverage and not necessarily due to increase in output.
  4. GVA is a better reflection of the productivity of the producers as it excludes the indirect taxes, which could distort the production process.
  5. A sector-wise breakdown provided by the GVA measure can better help policymakers to decide which sectors need incentives/stimulus or vice

Introduction of GVA at Basic Prices in India

In the revision of the National Accounts Statistics in January 2015 by the CSO, it was decided that sector-wise estimates of GVA will now be given at basic prices along with the factor cost.

The basic price for any commodity is the amount receivable by the producer from the purchaser minus any tax on the product plus any subsidy on the product. However, GVA at basic prices will include production taxes and exclude production subsidies available on the commodity.

On the other hand, GVA at factor cost includes no taxes and excludes no subsidies and GDP at market prices includes both production and product taxes and excludes both production and product subsidies.

The relationship between GVA at factor cost, GVA at basic prices, and GDP at market prices is as follows:

GVA at factor cost + (Production taxes less production subsidies) = GVA at basic prices

GDP at market prices = GVA at basic prices + Product taxes — Product subsidies

What Are Production Taxes and Subsidies?

Production taxes or production subsidies are paid or received with relation to production and are independent of the volume of actual production. Production taxes or production subsidies are given even if the products are not produced.

Some examples of production taxes are land revenue, registration fees, property taxes, and tax on profession. Some production subsidies include subsidies on tractors, on interest for loan, to village and small industries.

What Are Product Taxes and Subsidies?

Product taxes or subsidies are paid or received on per unit of product. Some examples of product taxes are excise tax, sales tax, service tax, and import and export duties. Product subsidies include food, petroleum, and fertilizer subsidies.

GVA at Basic Price versus Factor Cost

The difference between the value of the intermediate inputs and the value of the outputs is GVA. Two kinds of prices to measure output, namely basic prices and factor cost, are:

  • The basic price is the amount receivable by the producer from the purchaser for a product or service minus any tax payable and plus any subsidy receivable by the producer as a consequence of its production or sale.
  • The GVA at factor cost is the amount receivable by the producer from the purchaser for sale of goods or services produced minus any production as well as product taxes paid by the producer and plus any production or product subsidies received by the producer.

The basic price measures the amount retained by the producer and is, therefore, the relevant price for the producer’s decision-taking.

GVA at factor cost is essentially a measure of income and not output. It represents the amount remaining for distribution out of GVA after the payment of all taxes and receipt of all subsidies.

GROSS NATIONAL PRODUCT

Gross national product (GNP) refers to goods and services produced by Indians whether in India or abroad.

How Is GNP Calculated?

GNP = GDP — Production by foreigners in India + Production by Indians outside India

or

GNP = GDP — Factor income paid to foreigners in India + Factor income paid to Indians abroad

i.e.,    GNP = GDP — Net factor income from abroad

GNP refers to the monetary value of all the finished goods and services produced by nationals (citizens) anywhere in the world in a specific time period.

Comparison with GDP

GDP is the monetary value of all the finished goods and services produced in a territory such as India, whereas GNP is the monetary value of all the finished goods and services produced by nationals such as Indians.

In India, the value of GDP is higher than that of GNP because India has received more investment from abroad compared to the investment made by Indians in abroad.

NET DOMESTIC PRODUCT (AT MARKET PRICE)

Whenever there is production of goods and services, there is consumption or reduction in value of assets used to produce goods and services; this consumption or reduction in value of assets is called depreciation.

How Do We Calculate NDP?

Whenever we calculate the net value from gross value, we subtract depreciation out of gross value.

Net Domestic Product (NDP) = GDP — Depreciation

 

NATIONAL INCOME OR NET NATIONAL PRODUCT AT FACTOR COST

Net national product at factor cost (NNPfc) or national income is the income earned by nationals (such as Indians) in a given time period.

In other words, it is the collective income of nationals in a given time period. It is calculated as follows:

NNPfc = GNPmp – Depreciation – Indirect taxes + Subsidies

or

NNPfc = GDPmp – Net factor income abroad – Depreciation – Indirect taxes + Subsidies

PER CAPITA INCOME

Per capita income or average income measures the average income earned per person in a given area (city, region, country, etc.) in a specified year. It is calculated by dividing the area’s total income by its total population.

In other words, per capita income refers to national income divided by the population of a country.

Per capita income = National income/ Population

India’s per capita income in 2015-16 at the current prices was ₹93,293 in 2015-16, compared to ₹86,879 in the preceding year.

In real terms, the per capita income (at 2011-12 prices) during 2015-16 is estimated to have attained a level of ₹77,435, up 6.2% from ₹72,889 for 2014-15.

Real per capita income is obtained after adjusting nominal per capita income for inflation.

Real per capita income = Nominal per capita income / (1 + Inflation rate)

Let us understand the above concepts with actual figures given in the following table:

(₹1000 crore)

Year Consumption of

fixed cap.

(depreciation)

Indirect

taxes less

subsides

GDP

at market

prices

NDP

at market

prices

Net factor

income

from
abroad

NNP at

factor cost

or net
national
income

Per capita

income (₹)

2015-16 1278 923 11,350 10,072 -137 9012 77,435
2014-15 1193 825 10,552 9359 -124 8410 72,889
2013-14 1102 755 9839 8737 -122 7860 68,867

 

NDP at market prices = GDP at market prices – Depreciation

NNP at basic prices = NDP at market prices – Indirect taxes less subsidies – Net factor income abroad

Per capita income = Net national product at factor cost / Population

  1. WHICH IS A BETTER MEASURE OF ECONOMIC GROWTH: GDP OR PER CAPITA INCOME?

Economic growth is measured on the basis of expansion of GDP. However, there are instances when the rate of population growth is higher than the rate of increase in GDP. In such instances, GDP increases while per capita income decreases. Therefore, per capita income is considered a better indicator of economic growth.

Can India Grow at 8-9% per annum?

The Indian economy is currently passing through a phase of relatively slow growth. However, over the 9-year period beginning 2005-06, the average annual growth rate was 7.7%. Against this background, the relevant question is whether India has the capability to grow at 8-9% in a sustained way.

Past Performance

India achieved a growth rate of 9.5% in 2005-06, followed by 9.6% and 9.3% in the subsequent 2 years. After declining a bit in the wake of international financial crisis, the growth rate went back to 8.9% in 2010-11. The domestic savings rate during this period averaged 34.9% of GDP. Similarly, the gross capital formation rate averaged 36.2%.

Reasons for Reduction in Growth Rate: Low Investment and High ICOR

An analysis of the data of the period since 2012-13 reveals two trends. First, there has been a decline in investment rate. Second, the decline in growth rate is greater than the decline in investment rate, indicating a rise in the incremental capital-output ratio (ICOR). In 2007-08, India’s investment rate was 38% of GDP. It declined steadily to touch 34.8% in 2012-13. The declining trend continued in 2015-16.

With an ICOR of 4, only a return to higher level of savings and investments can take us back to 8-9% growth seen earlier. Thus, what is needed to achieve the “higher growth rate” is to raise the investment rate and improve the productivity (or use) of capital.

Indian Economy

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