National income calculation

30 Jan

The study of National Income is important because of the following reasons:
• To see the economic development of the country.
• To assess the developmental objectives.
• To know the contribution of the various sectors to National Income.
Internationally some countries are wealthy, some countries are not wealthy and some countries are in-between. Under such circumstances, it would be difficult to evaluate the performance of an economy. Performance of an economy is directly proportionate to the amount of goods and services produced in an economy. Measuring national income is also important to chalk out the future course of the economy. It also broadly indicates people’s standard of living.

Income can be measured by Gross National Product (GNP), Gross Domestic Product (GDP), Gross National Income (GNI), Net National Product (NNP) and Net National Income (NNI).

In India the Central Statistical Organization has been formulating national income.

However some economists have felt that GNP has a measure of national income has limitation, since they exclude poverty, literacy, public health, gender equity and other measures of human prosperity.

Instead they formulated other measures of welfare like Human Development Index (HDI)

Calculating National Income
There are various methods for calculating the national income such as production method, income method, expenditure method etc.

Production Method
The production method gives us national income or national product based on the final value of the produce and the origin of the produce in terms of the industry.

All producing units are classified sector wise.
• Primary sector is divided into agriculture, fisheries, animal husbandry.
• Secondary sector consists of manufacturing.
• Tertiary sector is divided into trade, transport, communication, banking, insurance etc.
Income Method:
Different factors of production are paid for their productive services rendered to an organization. The various incomes that includes in these methods are wages, income of self employed, interest, profit, dividend, rents, and surplus of public sector and net flow of income from abroad.

Expenditure Method:
The various sectors – the household sector, the government sector, the business sector, either spend their income on consumer goods and services or they save a part of their income. These can be categorized as private consumption expenditure, private investment, public consumption, public investment etc.

Calculation of National Income of India: A Brief History
The first attempt to calculate National Income of India was made by Dadabhai Naroji in 1867 -68. This was followed by several other methods. The first scientific method was made by Prof. V.K.R Rao in 1931-32. But this was not very satisfactory. The first official attempt was made by Prof.P.C.Mahalnobis in 1948-49, who submitted his report in 1954.

Difficulties in Calculation of National Income
In India there are various difficulties in calculating the national incomes .The most severe one is the finding of reliable data. Most of the time, it is based on assumptions. Soon after independence the National Income Committee was formed to collect data and estimate National Income. The two major problems which remain in the calculation of National Income are:
• Most of the data is not from the current year.
• Even if current data are available then values are underreported.
Obstacles in High Growth of National Income of India
Even if the Indian economy grows faster than the BRIC countries and G 6, the benefits of the growth would not be evenly distributed. India’s progress in education cannot be termed as satisfactory. In terms of higher education it has achieved tremendous success, but its unsatisfactory performance in primary education and secondary education has been a major obstacle to growth. Similarly India’s healthcare system is in a less than desirable state. Governments’ spending on public health has not been up to the required levels.

Growth Of National Income In India

Sector 1950-1980 1980-2005
GDP Total 3.5 5.6
GDP Per capita 1.4 3.6

Sectoral Composition Of National Income (in percent)

Year Primary Secondary Tertiary Total GDP
1950-51 59 13 28 100
1980-81 42 22 36 100
2002-03 24 24 52 100
GDP of India

The Indian economy is the 12th largest in USD exchange rate terms. India is the second fastest growing economy in the world. India’s GDP has touched US$1.25 trillion. The crossing of Indian GDP over a trillion dollar mark in 2007 puts India in the elite group of 12 countries with trillion dollar economy. The tremendous growth rate has coincided with better macroeconomic stability. India has made remarkable progress in information technology, high end services and knowledge process services.

However cause for concern would be this rapid growth has not been an inclusive in nature, in the sense it has not been accompanied by a just and equitable distribution of wealth among all sections of the population. This economic growth has been location specific and sector specific. For e.g. it has not percolated to sectors were labor is intensive (agriculture) and in states were poverty is acute (Bihar, Orissa, Madhya Pradesh and Uttar Pradesh).

Though India has the second highest growth rate in the world, its rank in terms of human development index (which is broadly used has a measure of life expectancy, adult literacy and standard of living) has gone down to 128 among 177 countries in 2007 compared to 126 in 2006.

Indian GDP –Trend Of Growth Rate

1960-1980 : 3.5%
1980-1990 : 5.4%
1990-2000 : 4.4%
2000-2009 : 6.4%

Contribution of Various Sectors in GDP

The contributions of various sectors in the Indian GDP for 1990-1991 are as follows:

Agriculture: – 32%
Industry: – 27%
Service Sector: – 41%

The contributions of various sectors in the Indian GDP for 2005-2006 are as follows:

Agriculture: – 20%
Industry: – 26%
Service Sector: – 54%

The contributions of various sectors in the Indian GDP for 2007-2008 are as follows:

Agriculture: – 17%
Industry: – 29%
Service Sector: – 54%

It is great news that today the service sector is contributing more than half of the Indian GDP. It takes India one step closer to the developed economies of the world. Earlier it was agriculture which mainly contributed to the Indian GDP.

The Indian government is still looking up to improve the GDP of the country and so several steps have been taken to boost the economy. Policies of FDI, SEZs and NRI investment have been framed to give a push to the economy and hence the GDP.
The human society around the world, over a period of time, has established greater contact, but the pace has increased rapidly since the mid 1980’s.The term globalization means international integration. It includes an array of social, political and economic changes. Unimaginable progress in modes of communications, transportation and computer technology have given the process a new lease of life.

The world is more interdependent now than ever before .Multinational companies manufacture products across many countries and sell to consumers across the globe. Money, technology and raw materials have broken the International barriers. Not only products and finances, but also ideas and cultures have breached the national boundaries.

Laws, economies and social movements have become international in nature and not only the Globalization of the Economy but also the Globalization of Politics, Culture and Law is the order of the day. The formation of General Agreement on Tariffs and Trade (GATT), International Monetary Fund and the concept of free trade has boosted globalization.

Globalization in India
In early 1990s the Indian economy had witnessed dramatic policy changes. The idea behind the new economic model known as Liberalization, Privatization and Globalization in India (LPG), was to make the Indian economy one of the fastest growing economies in the world. An array of reforms was initiated with regard to industrial, trade and social sector to make the economy more competitive. The economic changes initiated have had a dramatic effect on the overall growth of the economy. It also heralded the integration of the Indian economy into the global economy. The Indian economy was in major crisis in 1991 when foreign currency reserves went down to $1 billion and inflation was as high as 17%. Fiscal deficit was also high and NRI’s were not interested in investing in India. Then the following measures were taken to liberalize and globalize the economy.

Steps Taken to Globalize Indian Economy

Some of the steps taken to liberalize and globalize our economy were:

1. Devaluation: To solve the balance of payment problem Indian currency were devaluated by 18 to 19%.

2. Disinvestment: To make the LPG model smooth many of the public sectors were sold to the private sector.

3. Allowing Foreign Direct Investment (FDI): FDI was allowed in a wide range of sectors such as Insurance (26%), defense industries (26%) etc.

4. NRI Scheme: The facilities which were available to foreign investors were also given to NRI’s.

Merits and Demerits of Globalization

The Merits of Globalization are as follows:
• There is an International market for companies and for consumers there is a wider range of products to choose from.
• Increase in flow of investments from developed countries to developing countries, which can be used for economic reconstruction.
• Greater and faster flow of information between countries and greater cultural interaction has helped to overcome cultural barriers.
• Technological development has resulted in reverse brain drain in developing countries.
The Demerits of Globalization are as follows:
• The outsourcing of jobs to developing countries has resulted in loss of jobs in developed countries.
• There is a greater threat of spread of communicable diseases.
• There is an underlying threat of multinational corporations with immense power ruling the globe.
• For smaller developing nations at the receiving end, it could indirectly lead to a subtle form of colonization.
Summary
India gained highly from the LPG model as its GDP increased to 9.7% in 2007-2008. In respect of market capitalization, India ranks fourth in the world. But even after globalization, condition of agriculture has not improved. The share of agriculture in the GDP is only 17%. The number of landless families has increased and farmers are still committing suicide. But seeing the positive effects of globalization, it can be said that very soon India will overcome these hurdles too and march strongly on its path of development.

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