NATIONAL INCOME

THE SYSTEM OF REGIONAL ACCOUNTS IN INDIA

Regional accounts provide an integrated database on the innumerable transactions taking place in the regional economy and help decision making at the  regional  level. At present, practically all the states and union territories of India compute  state income estimates and district level estimates. State Income or Net State Domestic Product (NSDP) is a measure in monetary terms of the volume  of all goods and services produced in the state within a given period of time (generally     a year) accounted without duplication. Per Capita State Income is obtained by dividing the NSDP (State Income) by the midyear projected population of the state.

The state level estimates are prepared by the State Income Units of the respective State Directorates of Economics and Statistics (DESs). The Central Statistical Organisation assists the States in the preparation of these estimates by rendering advice on conceptual and methodological problems. In the preparation of state income estimates, certain activities such as are railways, communications, banking and insurance and central government administration, that cut across state boundaries, and thus their economic contribution cannot be assigned to any one state directly are known as the ‘Supra-regional sectors’ of the economy. The estimates for these supra regional activities are compiled for the economy as a whole and allocated to the states on the basis of relevant indicators.

LIMITATIONS AND CHALLENGES OF NATIONAL INCOME 

COMPUTATION

There are innumerable limitations and challenges in the computation of national income. The task is more complex in underdeveloped and developing countries. Following are the general dilemmas in measurement of national income. GDP measures ignore the following:

a)      Income distributions and, therefore, GDP per capita is a completely inadequate measure of welfare. Countries may have significantly different income distributions and, consequently, different levels of overall well-being for the same level of per capita income.

b)     Quality improvements in systems and processes due to  technological as  well  as managerial innovations which reflect true growth in output from year  to year.

c)      Productions hidden from government authorities, either because those engaged in it are evading taxes or because it is illegal (drugs, gambling etc).

d)     Non-market production (with a few exceptions)  and  Non-economic contributors to well-being for example: health of a country’s citizens, education levels, political participation, or other social and political factors that may significantly affect well-being levels.

e)      The dis-utility of loss of leisure  time.  We  know that, other things remaining the same, a country’s GDP rises if the total hours of work increase.

f)       Economic ’bads’ for example: crime, pollution, traffic congestion etc which make us worse off.

g)     The volunteer work and services rendered without remuneration undertaken in the economy, even though such work can contribute to social well-being as much as paid work.

h)     Many things that contribute to our economic welfare such as, leisure time, fairness, gender equality, security of community feeling etc.,

i)        The distinction between production that makes us better off and production that only prevents us from becoming worse off, for e.g. defence expenditures such as on police protection. Increased expenditure on police due to increase in crimes may increase GDP but these expenses only prevent us from becoming worse off. However, no reflection is made in national income of the negative impacts of higher crime rates. As another example, automobile accidents result in production of repairs, output of medical services, insurance, and legal services all of which are production included in GDP just as any other production.

                                 

There are many conceptual difficulties related to measurement  

which are difficult  to resolve, such as:

·         lack of an agreed definition of national income,

·         accurate distinction between final goods and intermediate goods

·         issue of transfer payments,

·         services of durable goods,

·         difficulty of incorporating distribution of  income

·         valuation   of a new good at constant prices,  and

·         valuation of government services

 Other challenges relate to:

·         Inadequacy of data and lack of reliability of available data,

·         presence of non-monetised sector,

·         production for self-consumption,

·         absence of recording of incomes due to illiteracy and ignorance,

·         lack of proper occupational classification, and

·         accurate estimation of consumption of fixed capital

SUMMARY

·         National income accounts are extremely useful for  analyzing and  evaluating the performance of an economy, knowing the composition and structure of the national income, income distribution, economic forecasting and for choosing economic policies and evaluating them..

·         Gross domestic product (GDP MP) is a measure of the market value of all final economic goods and services, gross of depreciation, produced within the domestic territory of a country during a given time period gross  of depreciation.

·         Capital goods (business plant and equipment purchases) and inventory investment—the net change in inventories of final goods awaiting sale or of materials used in the production are counted in GDP

·         To eliminate the effect of prices, in addition computing GDP in terms of current market prices, termed ‘nominal GDP’ or GDP at current prices, the national income accountants also calculate ‘real GDP ’or GDP at constant prices  which   is the value of domestic product in terms of constant prices of a chosen base year.

·         GNP MP = GDP MP + Net Factor Income from Abroad

·         NDP MP = GDP MP  -  Depreciation

·         NDP MP = NNP MP - Net Factor Income from Abroad

·         NNP MP = GNP MP - Depreciation

·         Market Price = Factor Cost + Net Indirect Taxes= Factor Cost + Indirect Taxes

–        Subsidies

·         Gross Domestic Product at Factor Cost (GDPFC) = GDP MP – Indirect Taxes + Subsidies

·         Net Domestic Product at Factor Cost (NDPFC) is defined as the total factor incomes earned by the factors of production.

·         Net National Product at Factor Cost (NNPFC) or National Income

·         NNPFC = National Income = FID (factor income earned in domestic territory) + NFIA.

·         Personal income is a measure of the actual current income receipt of persons from all sources. Disposable Personal Income (DI) that is available for their consumption or savings DI = PI - Personal Income Taxes

·         Circular flow of income refers to the continuous interlinked phases in  circulation of production, income generation and expenditure involving different sectors of the economy.

·         Product Method or Value Added Method is also called Industrial  Origin Method or Net Output Method and entails the consolidation of the production of each industry less intermediate purchases from all other industries.

·         Under income 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. Transfer incomes are excluded.

·         Under the expenditure approach, also called Income Disposal Approach, national income is the aggregate final expenditure in an economy during an accounting year composed of final consumption expenditure, gross domestic capital formation and net exports.