What is GDP?

Growth of a country is measured by national income and its variants. GDP one of is the most important indicators among all national income measures. GDP is the final value of the goods and services produced within the geographic boundaries of a country during a specified period of time, normally a year. GDP measured by three methods- product or value added method, income method and expenditure method. In product method, only the ‘value added’ at various stages of production are summed up (total value of a product minus the value of inputs), and so product method is also called ‘value added’ method of national income accounting. GDP can also be measured in terms of factor incomes, i.e. sum of wages, rent, interest and profit for household sector, for business sector and government; it is also called Gross Domestic Income. There is also expenditure method of calculating GDP by adding aggregate expenditure of households, business and government and this is conceptually equal to GDP.

Gross, Net, Domestic, National, Real and Nominal GDP

The ‘gross’ value of goods and services do not make any adjustment for depreciation in the production process. Gross value minus depreciation gives the ‘net’ values of national product/income. “Domestic” values of national product includes all economic activities in the geographical territory of a nation plus exclusive economic zones (200 nautical miles in the sea), all embassies and consulates, all air and shipping vessels originating from a country and all foreign entities- individuals and companies who are “residents”, that is those which live in the country for more than a year and their core economic interest lies in the country. “National” values of national product are equal to domestic plus “net factor income from abroad.”    Domestic or national product at current market price is called “nominal national product/income” while national product at constant or basic market price is called “real national income”

In the above description, we have GDP at current market price, NDP at current market price, GNP at current market price and NNP at current market price, all are categorized as “nominal national product/income.” From gross values net is driven by substracting depreciation.

We can also measure GDP at constant/basic prices, NDP at constant/basic prices and GNP at constant/basic prices and NNP at constant /basic prices, all of which are categorized as “real national product/Income.”

GDP Growth Rate in 2017-18

  • After registering GDP growth of over 7 per cent for the third year in succession in 2016-17, the Indian economy is headed for somewhat slower growth, estimated to be 6.5 per cent in 2017-18, as per first Advance Estimates released by CSO.
  • According to advance estimates Gross Value Added at basic prices (constant market price) grew at the rate of 6.1 per cent while GDP at current Market price grew at 6.5 per cent. The first estimate is about estimate of real GDP while the second is about nominal GDP.
  • Even with this lower growth for 2017-18, GDP growth has averaged 7.3 per cent for the period from 2014-15 to 2017-18, which is the highest among the major economies of the world.
  • The growth in nominal GDP in 2016-17 is estimated to be 11 per cent and it is expected at 9.5 per cent in 2017-18 on account of both lower real growth as well as lower value of deflator in 2017-18. The growth of nominal GVA in these two years is estimated to the 9.7 per cent and 9.0 per cent respectively. The differences in the nominal growth between GVA and GDP have also increased in the last few years. This is indicative of an increase in the share of net indirect taxes in GDP.

Sector wise Trends of Growth

According to advance estimates for 2017-18, growth rate of agriculture, forestry and fishing was 2.1 per cent; industry was 4.4 per cent and services 8.3 per cent. We infer from these estimates that the Indian economic growth has been led primarily by services sector.

The main activities used for estimating industrial growth in India include mining & quarrying, manufacturing, electricity, gas water supply & and other utility services and construction. These activities are collectively called “secondary sector” in national income accounting.

One reason why industry growth might have decelerated could be the slowdown in credit growth. Growth of credit deployed (outstanding) to industry slowed significantly in 2015-16, turned negative in 2016-17, and has continued to remain so in H1 of 2017-18. This decline may be due to lower demand for credit or greater recognition of the problem of non-performing assets (NPAs) that might have led the banks to become more cautious on lending.

The services sector includes trade, hotel, transport, storage and communication & services related to broadcasting; financial, real estate and professional services and public administration, defense & other services. These activities are collectively called “tertiary sector” in national income accounting.

GVA and GDP

To understand the above trend, it is important to understand the difference between GVA and GDP.

In economics, Gross value added (GVA) is the measure of the value of goods and services produced in an area, industry or sector of an economy. In national accounts GVA is output minus intermediate consumption; it is a balancing item of the national accounts’ production account. GVA is linked as a measurement to gross domestic product (GDP), as both are measures of output. The relationship is defined as:

GVA + taxes on products – subsidies on products = GDP

As the total aggregates of taxes on products and subsidies on products are only available at whole economy level, Gross value added is used for measuring gross regional domestic product and other measures of the output of entities smaller than a whole economy. Restated,

GVA = GDP + subsidies – (direct, sales) taxes

GVA + taxes on products – subsidies on products = GDP. As the total aggregates of taxes on products and subsidies on products are only available at whole economy level, Gross value added is used for measuring gross regional domestic product and other measures of the output of entities smaller than a whole economy.

Real and nominal GDP trends

In the recent years, the wedge between the real and nominal GDP growth has narrowed significantly. While real GDP growth averaged 6.4 per cent between 2012-13 and 2014-15, the nominal growth was 12.5 per cent in this period. In comparison, during the three-year period from 2015-16 to 2017-18, the real and nominal GDP average growth is estimated to be 7.2 per cent and 10.1 per cent respectively, pointing to higher differences in the former period than latter. This is not surprising given that the fact that inflation in the earlier period (particularly in 2012-13 and 2013-14) was significantly higher than the latter.

India’s GDP at current market prices in 2017-18 (advance estimates) —- Rs. 12985363 crore

Absolute value of GDP and per capita GDP

India’s per capita net National Income (at current prices) in 2017-18—– Rs. 111782

The real per capita income (measured in terms of per capita net national income at constant (2011-12) prices is one of the important indicators representing the welfare of people of a country. It is expected to increase from Rs. 77,803 in 2015-16 to Rs. 86,660 in 2017-18, growing at an annual average rate of 5.5 per cent. In nominal terms it increased by an average of 9.0 per cent per annum from Rs. 94,130 in 2015-16 to Rs. 111,782 in 2017-18.

Aggregate Consumption and GDP

Consumption expenditure has been the major driver, accounting for nearly sixty per cent of the total GDP growth between 2012-13 and 2015-16. This contribution increased to over 95 per cent in 2016-17, which is attributed to higher growth of both Private Final Consumption Expenditure (PFCE) and Government Final Consumption Expenditure (GFCE), particularly the latter. Growth of GFCE was nearly 21 per cent in 2016-17, against an average growth of 3.5 per cent during 2012-13 to 2015-16. This owed mainly to the payment of higher wages and salaries to the government staff that followed the implementation of the recommendations of the Seventh Pay Commission. The growth of both PFCE and GFCE is expected to be lower in 2017-18 as compared to 2016-17.

Aggregate Investment and GDP

The share of investment, and in particular that of fixed investment in the GDP continuously declined between 2011-12 and 2016-17. While fixed investment was 34.3 per cent of GDP in 2011-12, it declined to 27.1 per cent in 2016-17. Although fixed investment is expected to grow at a faster rate in 2017-18 than in 2016-17 (thus pointing to some recovery in investment), it is still not high enough to prevent a further reduction in the share of fixed investment in GDP.

Share of export sector in GDP

After nearly stagnating in 2014-15 and declining in 2015-16, exports of goods and services began to pick up in 2016-17. Imports also increased but at a slower pace, thus helping in narrowing the current account deficit in 2016-17. Exports are expected to grow at 4.5 per cent in 2017-18, while imports are expected to grow at a faster rate. As a result, the share of net exports of goods and services (as reflected in National Accounts Statistics) in GDP is expected to decline from (-) 0.7 per cent in 2016-17 to (-) 1.8 per cent in 2017-18.

Methods of Measurement of GDP in India

Methods of GDP Measurement

  1. Output Method: This measures the monetary or market value of all the goods and services produced within the borders of the country. In order to avoid a distorted measure of GDP due to price level changes, GDP at constant prices or real GDP is computed. GDP (as per output method) = Real GDP (GDP at constant prices) – Taxes + Subsidies.2. Expenditure Method: This measures the total expenditure incurred by all entities on goods and services within the domestic boundaries of a country. GDP (as per expenditure method) = C + I + G + (X-IM) C: Consumption expenditure, I: Investment expenditure, G: Government spending and (X-IM): Exports minus imports, that is, net exports.

    3. Income Method: It measures the total income earned by the factors of production, that is, labour and capital within the domestic boundaries of a country. GDP (as per income method) = GDP at factor cost + Taxes – Subsidies.

    In India, contributions to GDP are mainly divided into 3 broad sectors – agriculture and allied services, industry and service sector. In India, GDP is measured as market prices and the base year for computation is 2011-12. GDP at market prices = GDP at factor cost + Indirect Taxes – Subsidies

What is included and not included in GDP estimates?

Mixed income or income of the “self employed” is included in GDP estimates. Transfer payments and second hand products without any value addition in the year they are sold are not included in GDP. Transfer payments are payments for welfare or social security to the factors of production or ageing citizens, widows and the unemployed and not for their contribution to production; therefore, they are not included in GDP estimates because it is included as part of corporate investment (and if it is included again as household investment it would amount to double counting). Purchase of financial products offered by a company is not considered as an ‘Investment’ in GDP estimates. However if households invest in a new house, it is considered as an ‘investment’ as it seen as an investment towards a capital goods which would fetch him profit/income in the future. Income is obtained if he rents it out to others or if he resides there, it is considered as he is renting it to himself. Speculative gains from securities and other capital gains investments such as real estate; commodities; precious metals; and fine art are not considered production of the year for which GDP is calculated, so these are not included in GDP estimates.

Who measure national Income in India?

The Central Statistical Organisation was setup in 1952 and later rechristened as Central Statistical Office.The first Government Statistician, H J Steer, an able specialist in National Income Accounting pioneered the development of the CSO and set very high standards in the recruitment of staff and building a respected organization. The Central Statistics Office (CSO) in the Ministry of Statistics and Programme Implementation (MoS & PI) is responsible for the compilation of National Accounts Statistics (NAS). At the State level, State Directorates of Economics and Statistics (DESs) have the responsibility of compiling their State Domestic Product and other aggregates.

The Central Statistics Office coordinates the statistical activities in the country and evolves statistical standards. It is headed by a Director General assisted by 5 Additional Director Generals. CSO has the following Divisions: National Accounts Division (NAD), Social Statistics Division (SSD), Economic Statistics Division (ESD), Training Division and Coordination and Publications Division (CAP). CSO is under the Ministry of Statistics and Programme Implementation.

 The Government of India ordered setting up National Statistical Commission on 1 June 2005 on the recommendation of C. Rangarajan Economic Advisory Council. The National Statistical Commission (NSC) of India is an autonomous body which formed in July 2006. The NSC is headed by economists Prof TCA Anant (Chief Statistician of India and Secretary of both NSC and Ministry of Statistics and Programme Implementation) and Dr. Radha Binod Burman (Chairman of NSC).

The objective of its constitution is to reduce the problems faced by statistical agencies in the country in relation to collection of data.Statistical agencies like the Central Statistical Office (CSO) and the National Sample Survey Organization (NSSO) face numerous problems in collecting data from State and Central government departments, but an autonomous body like the NSC is thought to be more able to coordinate things as a statutory status would lend it teeth. It would lay special emphasis on ensuring collection of unbiased data so as to restore public trust in the figures released by the Government.

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