Editorial Today – India’s Gross domestic product (GDP) accelerates to 7.9%

What is GDP? Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders.

How GDP is calculated? There are three methods of calculating GDP.

How GDP is calculated in India? GDP is calculated by summing the Gross Value Added (GVA) per institutional sector.

Analysis  GDP growth accelerates to 7.9 %

What is GDP?

Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period. Though GDP is usually calculated on an annual basis, it can be calculated on a quarterly basis as well.

How GDP is calculated?

There are three methods of calculating GDP.

a) Product or Value added Method

b) Income Method

c) Expenditure Method

Ideally all the three methods should give the same result.

The most direct of the three is the production approach, which sums the outputs of every class of enterprise to arrive at the total.

The expenditure approach works on the principle that all of the product must be bought by somebody, therefore the value of the total product must be equal to people’s total expenditures in buying things. The income approach works on the principle that the incomes of the producer must be equal to the value of their product.

How GDP is calculated in India?

• In India, GDP is calculated by summing the Gross Value Added (GVA) per institutional sector (Agricultural sector,  Manufacturing, etc).
• There are eight sub-heads under which GDP data is presented.

1.Agriculture

2. Mining and quarrying

3. Manufacturing

4. Electricity, gas, water supply and other utility services.

5. Construction

6. Trade, hotels, transport, communication and services related to broadcasting

7. Financial, insurance, real estate and professional services

8. Public administration and defence and other services

• In India, GDP is estimated by Central Statistical Office (CSO)
• In the revision of National Accounts statistics done by Central Statistical Organization (CSO) in January 2015, it was decided that sector-wise wise estimates of Gross Value Added (GVA) will now be given at basic prices instead of factor cost.

(Gross value added (GVA) is defined as the value of output less the value of intermediate consumption. Value added represents the contribution of labour and capital to the production process. For example if a baker has produced Rs. 500 worth of bread; total value added by it is obtained by deducting the cost of intermediate goods like flour fromRs.500 in making bread.)

• So, where’s the difference? Under the old method, GDP was calculated at factor cost; now it will be done at basic prices. 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 (not food or petrol subsidies that we get on the final product). 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.
• Production taxes or production subsidies are paid or received with relation to production and are independent of the volume of actual production. Some examples of production taxes are land revenues, stamps and registration fees and tax on profession.
• Product taxes or subsidies are paid or received on per unit of product. Some examples of product taxes are excise tax, sales tax, service tax and import and export duties.
• So far, domestic GDP was calculated at factor or basic cost, which took into account prices of products received by producers. The new formula takes into account market prices paid by consumers. It is calculated by adding GDP at factor price and indirect taxes (minus subsidies). It is in line with international practice and is expected to better capture the changing structure of the Indian economy.GDP at factor cost= GDP (Market Price) – indirect taxes + subsidies

Analysis

• GDP growth accelerates to 7.9 %
• The agriculture sector grew 1.2 per cent compared to the advance estimate of 1.1 per cent. The sector contracted 0.2 per cent in the previous year.
• Private final consumption expenditure, a proxy for private demand, grew at 7.4 per cent in 2015-16 compared to 6.4 per cent in the previous year.
• Growth in gross fixed capital formation, a measure of private sector investment, slowed down to 3.9 per cent from 4.9 per cent in 2014-15.
• Construction sector grew 3.9 per cent in 2015-16 compared to 4.4 per cent in the year-earlier period. However, the sector grew at 4.5 per cent in the fourth quarter of FY16 compared to 2.6 per cent in the year earlier period.
• Manufacturing grew 9.3 per cent, slower than the 9.5 per cent forecast in the advance estimates. But this is much higher than the 5.5 per cent seen in 2014-15. The consolidated services sector grew 8.8 per cent in 2015-16 compared to 9.05 per cent mentioned in the advance estimates.
• India is seeing a strengthening economic recovery led by consumption. The story of improved momentum fits well with other recent private sector data on passenger car sales, cement dispatches, corporate profit margins and power production.
• Investment activity continues to be weak. The reasons are well known: stressed corporate balance sheets, low utilisation of existing capacity and fragile business confidence.