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GDP in India: What Is GDP, How To Calculate It?

By Kavinkal Satyanarayan
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What is GDP

Gross Domestic Product(GDP) means the sum total of all goods and services produced in a country, expressed in money terms, during a specific period, generally an year. It is a vital macroeconomic parameter both as an indication of the capacity of the Economy as also its efficiency.

 

This is so because GDP correlates well with most of the other socio-economic indicators like poverty, unemployment, standard of living and even literacy and standard of health. In most cases the correlation is in marginal or incremental basis.

Consistently growing GDP is likely to positively impact poverty, health care, literacy, employment etc., in the Economy. Hence concept of GDP is critical to understanding the Economic well being of the State.

GDP in India: What Is GDP, How To Calculate It?

How to calculate GDP?

The folllowing equation is used to calculate GDP:

  • GDP=Private consumption+ gross investment + government investment + government spending + (exports - imports)
  • The GDP deflator remains extremely important as it measures price inflation.
  • It is calculated by dividing Nominal GDP by Real GDP and then multiplying by 100. (Based on the formula).

Types of GDP

Although GDP is easy to define, it is difficult to calculate, at least to do justice to the idea it claims to represent. At first glance, it is the sum of the product of the total quantity of goods or services produced by the unit price. The difficulty is that prices are constantly changing from place to place, even within the country. This makes comparison difficult. So there is a lot of average and indirect estimation through taxes, etc., which introduces approximations and errors.

 

1) Real GDP

One way is to keep the price fixed in a base year and calculate the GDP. This gives us what is called real GDP, which reflects the change in the quantity of goods and services from the fixed price in the base year. In the case of the Indian economy, the base year is 2011-12.

2) Nominal GDP

When GDP is calculated using current market prices, it is called nominal GDP. Real GDP is more reflective of economic growth from a government perspective and is good for comparison. Nominal GDP is what most directly affects citizens. The ratio of nominal GDP to real GDP is called the cost inflation index (CII). The Sales Price Index (WPI) and the Consumer Price Index (CPI) are derived from IIC data to present a more realistic picture of inflation as it affects ordinary people. Most of these indices are obtained when the GDP data are compiled and are closely linked.

GDP Estimation in India

In India the Ministry of Statistics and Program Implementation is responsible for estimating the national GDP. The National Accounts Division under the Central Statistical Office is responsible for preparation of the National Accounts of which GDP estimation is a part. GDP estimates are prepared every quarter and published with a lag of Two months. The annual GDP estimates are published on 31 May each year. GDP estimates are prepared both at Constant Prices as also Current Prices in India. GDP estimates are prepared in two ways. One by consolidating the Gross Value Addition in the Economy and

Second by adding up the expenditure incurred in generating such value in the Economy. Effectively there are four tables, two each for Real and Nominal GDP and the higher of the two figures is taken as the correct value.

The real GDP for QE4 2017-18 was Rs 31 Lakh Crores registering a 7.6% increase over the corresponding quarter of the previous Year. The breakup of Real GDP data for the fourth quarter of 2017-18 is as follows.

Nominal GDP is also similarly computed under the same subheads but using current market prices. The Q4 nominal GDP for 2017-18 was about Rs 39 Lakh Crore registering a growth of 11.4%. The above estimates are final estimates. The initial estimates put out by the CSO are provisional. The CSO has published the provisional estimates of 2017-18 GDP. The data is summarised as follows: -

Sectoral Breakup of GDP

The Sectoral breakup of GDP is as follows: -

1) Agriculture:17%

2) Industry:29%

3) Service:30%

The Sectoral breakup of GDP throws up some concerns about the Indian Economy. The Agricultural Sector that engages more than 50% of the Indian work force earns just 17% of the GDP.

This calls for Agricultural sector reforms to make it more efficient as a National priority. The other highlight is the constantly growing Service sector which contributes more than 50% of GDP. Both Industry and Agriculture that actually create wealth need to become far more efficient.

Flaws in the Concept of GDP

Income Distribution. Per capita income is an important output of GDP calculation. Per Capita GDP of India as of 2017-18 is about Rs1,27,456. International Monetary Fund estimates that 70% of Indians earn less than $2 a day, which translates to a per capita of about Rs 50,000 a year. This suggests a vast disparity in income amongst citizens. GDP estimates fail to capture income distribution. The Gini Coefficient, which captures income disparity, for India is estimated to be 0.5. The better off countries are as low as 0.2 and the worse off ones above 0.6. Gini coefficient 0.5 is considered alarmingly high. A high GDP or rapid GDP growth rate is not necessarily inclusive.

GDP and Quality of Life

It is said that GDP estimates Economic prosperity by measuring outputs of items like Steel and Wheat. It fails to capture intangibles like information and knowledge which greatly enhances quality of life. Similarly, house work that adds so much value to life is completely ignored in GDP calculation. The relation between GDP and quality of life is somewhat tenuous.

GDP and Natural Disasters

Natural disasters tend to enhance GDP. Disasters like Floods, Earthquake, Drought etc lead to temporary fall in the productivity of the effected population which depresses GDP. But Government expenditure for recovering from the disaster enhances GDP to an even greater extent. Such expenditure is more for restoration than Economic progress per se. Hence GDP can be misleading indicator of Economic progress.

The aforesaid short comings in the concept of GDP is certainly not peculiar to India alone but is quite universal. But the effect of such flaws varies from country to country. Take income distribution for instance. Citizens of Countries with smaller Gini Coefficient can better identify with their GDP numbers, since it tracks their productivity better. Where Gini coefficient is high, the correlation is intangible.

Conclusion

The last Quarter of 2017-18 registered a GDP growth rate of 7.7% making our Indian Economy the fastest growing economy in the world. Yet there is little cheer or celebration in the country.

Even the media tracks oil prices, Rupee exchange rate, Bank NPA or such negative economic indicators more assiduously rather than discuss the path the economy will follow to become a $5 Trillion economy. Such benign neglect, of what is a scintillating achievement for the Nation, cannot be entirely attributed to Politics or cynicism. The effect of Economic Growth takes time to be felt especially in a large country like India.

It is only those who saw the 70s when you stood in lines everywhere to be served, including Banks, Post Offices, Railway Stations, Bus stops, Ration Shops, even STD Booths as can sense the change. Then Cars and P&T phones were family heirlooms that passed over generations through Wills or dying declarations. Apple was a fruit, Tweeting is what birds did, and Internet was a Mosquito net Brand name.

Not so the for the Millennials, who are born and brought up in houses with LCD TV, Online internet gaming and in the constant companionship of social media compatible Smart Phones. Their expectations are governed by best in world class standards and what they see in foreign holiday trips.

And why not? GDP measures growth, expectations drive economic growth. Maybe that is why countries like Bhutan have an index called Gross Happiness Product which measures contentment, satisfaction and happiness of its Citizens.

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