According to growth projection released by the Central Statistics Office (CSO), India’s Gross Domestic Product (GDP) growth is expected to grow at a slower pace at 7.1% in 2016-17 as compared to 7.6% in 2015-16. This estimate is in sync with the Reserve Bank of India’s (RBI) economic growth forecast and is largely based on data from the first seven months of the year. The slowdown is chiefly due to an industrial slowdown.
- Per capita net national income during 2016-17: estimated to be Rs.1,03,007, rise of 10.4% as compared to Rs. 93,293 during 2015-16 with the growth rate of 7.4%.
- Agriculture, forestry and fishing sector: likely to show a growth of 4.1% during 2016-17, as against the previous year’s growth rate of 1.2%.
- Manufacturing sector: It is estimated to grow by 7.4% in 2016-17 as compared to growth of 9.3% in 2015-16.
- Wholesale price index (WPI): food articles has risen by 6.9%, manufactured products 2.0%, and electricity -1.4% and all commodities 2.8% during April-November 2016-17 period.
- Consumer price index: It has shown a rise of 5.0% during April-November 2016-17.
This estimate does not factor in the impact of the Union Government’s demonetization decision announced on November 8, 2016. The outcome-based numbers from the September to December 2016 quarter will be captured in the next growth projection to be released in February 2017.
New Method of calculating GDP
The comprehensive review of the methodology for estimation of National Accounts is period exercise of Central Statistical organization. The new method uses FY 2011-12 as the base year instead of FY 2004-05. The revised calculation also incorporates more comprehensive data on corporate activity, and newer surveys of spending by households and informal businesses. The new method is based on gross value added (GVA) at market price rather than factor costs. These changes in calculation methods has brought Indian GDP calculations more in line with global practice.
Changes in Gross Value Added (GVA) estimates
- In earlier series with base year 2004-05, GVA had been prepared at the factor cost. In accordance with international practice and conventions, new series estimates GVA at basic prices.
- Earlier “GDP at factor cost” was known as simply the “GDP” in India. In the revised series, as is the practice internationally, industry-wise estimates are presented as GVA at basic prices, while “GDP at market prices” will be referred to as “GDP”.
- The statistics department changed the way it calculates the headline GDP growth number to GDP at market prices from GDP at factor cost to make India’s growth rates comparable internationally.
- To understand the difference, let us look at it from the producers’ point of view. For a producer, GDP at factor cost represents what he gets from the industrial activity. This can be broken down into various components — wages, profits, rents and capital — also commonly known factors of production. Aside from these costs, producers may also incur other expenses such as property tax, stamp duties and registration fees, among others.
- Similarly, producers may also receive subsidies (production related) such as input subsidies to farmers and to small industries. It is important to note that only taxes and subsidies on intermediate inputs are adjusted.
- For arriving at the new gross value added (GVA) at basic prices, production taxes, such as property tax, are added and subsidies are subtracted from GDP at factor cost. Put simply, GVA at basic price represents what accrues to the producer, before the product is sold.
Methods of Calculating GDP
The general definition of GDP is rather simple – however, economists seldom like simplicity, and therefore there are three different ways to calculate GDP.
1. Production Method
The production approach to GDP is the market value of all final goods and services. Also called the “net product” method, it includes three statistics:
- Gross Value Added:Estimation of the gross value of various domestic economic activities.
- Intermediate Consumption:Determination of the cost of materials, supplies, and labor used to create goods and services.
- Value of Output:Deduction of the intermediate consumption from the gross value, which gives you the GDP. This is how you determine GDP via the production method.
2. Income Approach
Many economists dislike the production method as a means to measure GDP as it does not include income. Rather, they believe that the money each family brings home is a better way to evaluate the economic strength of the country. Therefore, the income approach measures the annual incomes of all individuals in a country.
Incomes are culled from five different areas:
- Wages, salaries, and supplementary labor income
- Corporate profits
- Interest and miscellaneous investment income
- Farmers’ income
- Income from non-farm unincorporated businesses
Once these numbers are added, two further adjustments must be made to arrive at the GDP via this method. Indirect taxes, such as sales taxes at a convenience store, minus tax subsidies (tax breaks or credits) are added to arrive at market prices. Then, depreciation on various hard assets (buildings, equipment, etc.) is added to that to arrive at the GDP number. The idea behind the income method is to try to get a better handle on real economics activity.
3. Expenditure Approach
There are, in fact, other economic theorists who believe that neither the income approach nor the production method is sufficient. In theory, income is not generated to be hoarded. People might save and invest, but they will definitely purchase needed and desired goods. From this basic viewpoint, the expenditure approach was developed. This approach measures all expenditures by individuals within one year.
The components of this method are:
- Consumption as defined by purchases of durable goods, non-durable goods, and services. Examples include food, rent, gas, clothes, dental expenses, and hairstyling. The purchase of a new house, however, is not included as consumption. Consumption is the largest component of this method of determining GDP.
- Investment means capital investments, such as equipment, machinery, software, or digging a new coal mine. It does not mean investments in financial products, like stocks and mutual funds.
- Government Spending is the total of government expenditures on goods and services, including all costs of government employee salaries, weapons purchased by the military, and infrastructure costs. For example, the money spent on the war in Iraq is included, as is the money spent in the stimulus bill in 2008. Social Security and unemployment benefits, however, are not included.
- Net Exports are calculated by subtracting the value of imports from the value of exports. Exports are goods that are created in this country for other nations to consume, while imports are created in other nations and consumed domestically.
Why GDP Matters?
When the GDP is growing, a country is generally improving economically: Companies are hiring, and people are working. It is like using the Dow Jones Industrial Average to measure the stock market. The DJIA provides a quick read of the market, while the GDP provides a quick read of the economic health of a country.
Often, the GDP numbers are used to determine whether we are in a recession or an expansion (a growing economy). If a country experiences two consecutive quarters of declining GDP, it is in a recession. If the country shows increasing GDP numbers over two quarters, then it is expanding. Aside from measuring economic growth within a country, GDP is also used as a benchmark to measure the economies of competing countries.
The top 10 countries by a measure of GDP are:
- United States
- United Kingdom
In real and practical terms India’s GDP is still lag far behind any developed countries even compared with China.
- Base year: Base year analysis is mainly done to eliminate the effects of inflation and to give a more meaningful picture of the data. This monetary value is first calculated in nominal terms or at current prices. It is then adjusted for inflation or the changes in the general price level over time and is thus, expressed in terms of the general price level of some reference year, called as the base year.
- GDP at Market Price: GDP at factor costs is a measure of national income that is based on the cost of factors of production. It is essentially looking from the producers’ side. GDP at market prices essentially looks at economic activity from the consumers’ angle. It measures GDP at the last step of the transactions, which is the market price paid by the consumer.
[ GDPMP = GDPFC + Indirect Taxes –Subsidies ]
- For arriving at the new gross value added (GVA) at basic prices, production taxes, such as property tax, are added and subsidies are subtracted from GDP at factor cost.
- GDP at market prices makes adjustment for any subsidy or indirect tax — to arrive at GDP at market price, indirect taxes are added while subsidies are subtracted from GVA at basic price.
- Finally, inflation needs to be adjusted to arrive at GDP at constant market prices.