MEASUREMENT OF NATIONAL INCOME IN INDIA
National Accounts Statistics (NAS) in India
are compiled by National Accounts Division in the Central Statistics Office, Ministry of Statistics and Programme
Implementation. Annual as well as quarterly estimates are published. This
publication is the key source-material for all macroeconomic data of the
country. As per the mandate of the Fiscal
Responsibility and Budget Management Act 2003, the Ministry of Finance uses the
GDP numbers (at current prices) to determine the fiscal targets.
The Ministry of
Statistics and Programme Implementation has released the new series of national
accounts, revising the base year from 2004-05 to 2011-12. In the revision of
National Accounts statistics done by Central Statistical Organization (CSO) in
January 2015, it was decided that sector-wise estimates of Gross Value Added
(GVA) will now be given at basic prices instead of at factor cost. In simple
terms, for any commodity the ‘basic price’ is the amount receivable by the
producer from the purchaser for a unit of a product minus any tax on the
product plus any subsidy on the product.
The Circular
Flow of Income
Circular flow of
income refers to the continuous circulation of production, income generation
and expenditure involving different sectors of the economy. There are three
different interlinked phases in a circular flow of income, namely: production,
distribution and disposition as can be seen from the following points:
·
In the
production phase, firms produce goods and services with the help of factor services.
·
In the
income or distribution phase, the flow of factor incomes in the form of rent, wages,
interest and profits from firms to the households occurs
·
In the
expenditure or disposition phase, the income received by different factors of production is spent on consumption
goods and services and investment goods. This expenditure leads to further production
of goods and services and sustains the circular flow.
These processes of production,
distribution and disposition keep going on simultaneously and enable us to look
at national income from three different angles namely: as a flow of production or value added, as a flow
of income and as a flow of expenditure.
Each of these different ways of looking at national income suggests a different
method of calculation and requires a different set of data. The details in respect
of what is measured and what data are required for all three methods mentioned above
are given in the following table.
Data requirements and Outcomes of
Different Methods of National Income Calculation
|
Method
|
Data required
|
What is measured
|
|
Phase of Output:
Value added method (Product Method)
|
The sum of net
values added by all the producing enterprises of the country
|
Contribution of
production units
|
|
Phase of income :
Income Method
|
Total factor incomes
generated in the production of goods and services
|
Relative
contribution of factor owners
|
|
Phase of
disposition: Expenditure method
|
Sum of expenditures
of the three spending units in the economy, namely, government, consumer
households, and producing enterprises
|
Flow of consumption
and investment expenditures
|
Corresponding to the
three phases, there are three methods of measuring national income. They are:
Value Added Method (alternatively known as Product Method); Income Method; and
Expenditure Method.
Value Added
Method or Product Method
Product Method or Value Added Method is
also called Industrial Origin Method.
National income by value added method is
the sum total of net value added at factor cost across all producing
units of the economy. The value added method measures the contribution of each producing
enterprise in the domestic territory of the country in an accounting year and entails
consolidation of production of each industry less intermediate purchases from all
other industries. This method of measurement shows the unduplicated contribution
by each
industry to the total output. This method involves the following steps:
Step 1. Identifying the producing enterprises and classifying
them into different sectors according to the nature of their activities
All the producing
enterprises are broadly classified into three main sectors namely:
1.
Primary sector,
2.
Secondary sector,
and
3.
Tertiary sector
or service sector
These sectors are
further divided into sub-sectors and each sub-sector is further divided into
commodity group or service-group.
Gross value added (GVA MP) = Value of
output – Intermediate
consumption
= (Sales + change in stock) –Intermediate consumption
Step 2. Estimating the gross value added (GVA MP) by each producing enterprise
Step 3. Estimation of National income
∑ (GVA MP) – Depreciation =
Net value added (NVA MP)
Adding the net
value-added by all the units in one sub-sector, we get the net value-
added by the
sub-sector. By adding net value-added or net products of all the sub- sectors of
a sector, we get the value-added or net product of that sector. For the economy
as a whole, we add the net products contributed by each sector to get Net Domestic Product. We subtract net indirect
taxes and add net factor income from abroad to get national income.
Net
value added (NVA MP) – Net Indirect taxes = Net Domestic
Product
(NVA FC)
Net Domestic Product (NVA FC) +
(NFIA) = National Income (NNP FC)
The values of the
following items are also included:
1.
Own account
production of fixed assets by government, enterprises and households.
2.
Production for
self- consumption, and
3.
Imputed rent of
owner occupied houses.
Income Method
Production is carried
out by the combined effort of all factors of production. The factors are paid factor
incomes for the services rendered. In other words, whatever is produced by a producing unit is
distributed among the factors of production for their services.
Under Factor Income
Method, also called Factor Payment Method or Distributed Share Method, national
income is calculated by summation of factor incomes paid out by all production
units within the domestic territory of a country as wages and salaries, rent,
interest, and profit. By definition, it includes factor payments to both
residents and non- residents.
thus,
NDP FC = Sum of factor incomes paid out by all production units within the domestic territory of a country
NDP FC = Sum of factor incomes paid out by all production units within the domestic territory of a country
Only incomes earned by owners
of primary factors of production are included
in
national income.
Transfer incomes are excluded from national income. Thus, while wages of
labourers will be included, pensions of retired workers will be excluded
from national income.
Labour income includes,
apart from wages
and salaries,bonus, commission,
employers’ contribution to provident fund and compensations in kind. Non-labour
income includes dividends, undistributed profits of corporations before taxes, interest, rent,
royalties and profits of unincorporated enterprises and of government enterprises.
However, normally, it
is difficult to separate labour income from capital income because in many
instances people provide both labour and capital services. Such is the case
with self-employed people like lawyers, engineers, traders, proprietors etc. In
economies where subsistence production and small commodity production is dominant,
most of the incomes of people would be
of mixed type. In sectors such as
agriculture, trade, transport etc. in underdeveloped countries (including
India), it is difficult to differentiate
between the labour element and the capital element of incomes of the people. In
order to overcome this difficulty a new category of incomes, called ‘mixed income’
is introduced which includes all those
incomes which are difficult to separate.
Expenditure Method
In the expenditure
approach, also called Income Disposal Approach, national income is the aggregate
final expenditure in an economy during an accounting year. In the expenditure approach to measuring
GDP, we add up the value of the goods and services purchased by each type of final
user mentioned below.
Final Consumption
Expenditure
a)
Private
Final Consumption Expenditure (PFCE)
To measure this, the volume
of final sales of goods and services to consumer households and nonprofit
institutions serving households acquired for consumption (not for use in
production) are multiplied by market prices and then summation is done. It also
includes the value of primary products which are produced for own consumption
by the households, payments for domestic services which one household renders
to another, the net expenditure on foreign financial assets or net foreign investment.
Land and residential buildings purchased or constructed by households are not
part of PFCE. They are included in gross capital formation. Thus, only expenditure
on final goods and services produced in the period for which national income is
to be measured and net foreign investment are included in the expenditure method
of calculating national income.
b)
Government
Final Consumption Expenditure
Since the collective services
provided by the governments such as defence, education, healthcare etc are not
sold in the market, the only way they can be valued in money terms is by adding
up the money spent by the government in the production of these services. This
total expenditure is treated as consumption expenditure of the government. Government
expenditure on pensions, scholarships, unemployment allowance etc.
should be excluded because these are transfer payments.
Gross
Domestic Capital formation
Gross domestic fixed capital
formation includes final expenditure on machinery and equipment and own account
production of machinery and equipments,
expenditure on construction, expenditure on changes in inventories, and expenditure
on the acquisition of valuables such as, jewelry and works of art.
Net Exports
Net exports are the difference
between exports and imports of a
country during the accounting year. It can be positive or negative.
How do we arrive at
national income or NNP FC using
expenditure method ? We first find the
sum of final consumption expenditure, gross domestic capital formation and net exports.
The resulting figure is gross domestic product at market price ( GDP MP ). To
this, we add the net factor income from abroad and obtain Gross National Product
at market price (GNP MP). Subtracting indirect taxes from GNP MP, we get Gross National
Product at factor cost (GNP FC). National income or NNP FC is obtained by subtracting
depreciation from Gross national product at factor cost (GNP FC).
Ideally, all the three
methods of national income computation should arrive at the same figure. When national
income of a country is measured separately using these methods, we get a three dimensional
view of the economy. Each method of measuring GDP is subject to measurement errors
and each method provides a check on the accuracy
of the other methods. By calculating total output in several different ways and
then trying to resolve the differences, we will be able to arrive at a
more accurate measure than would be possible with one method alone. Moreover, different
ways of measuring total output give us different insights into the structure of our economy.
Income method may be
most suitable for developed economies where people properly file their income
tax returns. With the growing facility in the use of the commodity flow method
of estimating expenditures, an increasing proportion of the national income is
being estimated by expenditure method. As a matter of fact, countries like
India are unable to estimate their national income wholly by one method. Thus,
in agricultural sector, net value added is estimated by the production method,
in small scale sector net value added is estimated by the income method and in
the construction sector net value added is estimated by the expenditure method.
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