What is Gross Value Added?

Written By: Archana L
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    In India, GDP is estimated by the Central Statistical Office (CSO). Under the Fiscal Responsibility and Budget Management Act 2003 and rules there under.

    The Ministry of Finance uses the GDP numbers to peg the fiscal targets. For this purpose, the Ministry of Finance makes their own projections about GDP for the coming years specifying future fiscal targets for the country.

    In the revision of National Accounts statistics done by the Central Statistical Organization in January 2015, it was decided that a sector-wise estimates of Gross Value Added (GVA) should be used and thus the GVA came into existence.

    What is Gross Value Added?

    In Economics, the term Gross Value Added (GVA) is the measure of the value of goods and services produced in an area or industry or sector of an economy.

    As per the national accounts, GVA is the output minus intermediate consumption. It is a balancing item of the national accounts' production account.

    Gross Value Added is a productivity metric. It measures the contribution to an economy, producer, sector or region.

    At Company Level

    The metric can be calculated to represent the gross value added by a particular product or the service which the company currently produces or provides. The total value added number would reveal how much of money the product or service has contributed towards meeting the company's fixed costs and thereby creating a bottom-line profit.

    After deducting the fixed capital and effects of depreciation, the company will arrive at the net value of the operation that adds to the bottom line.

    At Country Level

    The Gross Value Added is the output of the country less the intermediate consumption. It is the difference between gross output and net output. It is used in the calculation of Gross Domestic Product (GDP) of a country, which is a crucial indicator of the state of a nation's total economy.

    Reason Behind The Evolution Of Term Gross Value Added

    In January 2015, the Minister of State for Statistics and Programme Implementation
    (MOPSI) released the new series of a national account, revising the base year from 2004- 2005 to 2011-2012. With this, the GDP at factor cost has been replaced with Gross Value Added (GVA).

    Now, the GDP at market prices is referred to as GDP in government accounts. It is as per the recommendations of the United Nations System of National Accounts in 2008 and Pronab Sen Committee.

    The idea was mainly to make India's GDP numbers comparable with that of developed nations.

    How is Gross Value Added Calculated?

    Gross value added is related to Gross Domestic Product through taxes on products and subsidies on products.

    The formula for Gross Value Added is:

    Gross Value Added = Gross Domestic Product + Subsidies on products - taxes on products

    GVA at Basic Prices

    For any commodity, the basic price is the price 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.

    However, the GVA at basic prices will include the production taxes, and it excludes the production subsidies available on the commodity.

    GVA at Basic Prices = GVA at factor cost + (Production Taxes - Production Subsidies)

    GVA at Factor Cost

    GVA at Factor Cost includes no taxes and it excludes no subsidies.

    GDP at Market Prices

    GDP at market prices includes both production and product taxes and it excludes both production and product subsidies.

    GDP at Market Prices = GVA at Basic Prices + Product Taxes - Product Subsidies

    Why do policymakers give weight to GVA?

    A sector-wise breakdown provided by the GVA measure can help the policymakers to decide which sectors need incentives or stimulus or vice versa. Some people consider GVA as a better gauge of the economy because of the sharp increase in the output, due to the higher tax collections.

    Which measure is more appropriate to assess the economy?

    GVA is a more appropriate measure to assess the economy compared to GDP.

    The GVA measure helps the policymakers to decide which sector need incentives or stimulus, and accordingly, they can chalk out actions for sector-specific policies.

    GDP is used as a key measure for cross-country analysis as it helps in comparing the incomes of different economies.

    Story first published: Tuesday, March 6, 2018, 13:16 [IST]
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