National Income Accounting in India

According to the First report of the National Income Committee, “National income estimate measures the volume of commodities and services turned out during a given period, counted without duplication.” This means the total volume of goods and services produced in a year in a country is valued in monetary terms to obtain the National income of the country concerned.

Regarding the measurement of National income, it could be done in three different ways depending upon the interpretation of concept of national income. If National income is considered as a flow of goods and services, then the method used is called Product method. If National income is treated as a flow of income then the relevant method of measuring it is called Income method. Alternatively, if National income is treated as a flow of expenditure, the method used is called the Expenditure method. Apart from these traditional methods of measuring National income, one more method is evolved and it is called the Value added method. Let us now look into the contents of each of these methods.

  1. Product method: In this method, the value of goods and services produced in an economy during a year is found at the market prices, to obtain the GNP at market prices. By subtracting indirect taxes and adding subsidies, we obtain the Gross National Product (GNP) at factor cost. By deducting from GNP the depreciation, we obtain the Net National Product (NNP).
  2. Income method: When we aggregate the income received by various factor services, like rent, wages/salaries, interest and profit we obtain the National income at a factor cost. By deducting depreciation from this we obtain the Net National income at factor cost.
  3. Expenditure method: By classifying expenditure as consumption expenditure and investment expenditure, and then adding them will get is the National income. This could be calculated at market prices or at factor cost as in the other methods.
  4. Value added method: In all the above methods, there is a possibility of double counting and to avoid this the best method is to sum up only the value added to the product or services at every stage. In that manner only the net accretion in value of a product or service will be taken into account to arrive at the final value of all goods and services produced in a year. This method is by far considered as the best though it bristles with certain problems and difficulties.

In India we adopt a combination of the product method and income method for measuring National Income.

Analysis of the National income in India has yielded the following trends:

  1. Changes and fluctuations in the growth rate of National income was very high between years. The main reason for this is that we continue to depend on uncertain monsoon to succeed every year. A successful monsoon boosts up the rate of growth while an adverse monsoon brings down the rate. In Indian experience, the failure of monsoon is a regular feature and so the growth rate in National income has been declining over the decades.
  2. An interesting observation is that this overall fluctuations over the period is quite consistent with the fluctuations recorded by the primary, secondary and tertiary sectors. In other words, these basic sectors were not free from fluctuations and in a way the fluctuations in them cause the over all fluctuations. Among the sectors, the primary sector understandably recorded wide fluctuations followed by the secondary and then the tertiary sectors. This observation is more confirmed when we study the sectoral contribution.
  3. The contribution by different sectors to the Net Domestic Product (NDP) will vary from country to country and even for a country from time to time depending upon the stage of economic development. It is usual that in the initial stage of development the contribution by primary sector will be very much higher than in the other sectors and over a period this would change. In Indian case also this has become true.
  4. When we study the compound growth rate of commodity and non-commodity sectors, we find that the rate of growth is higher in the case of latter. This tendency is welcome because the primary and secondary sectors can only generate limited employment opportunities while the service sector or the tertiary sector or the non-commodity sector has greater potential in respect of employment. With economic development, the share of transport, communication, energy, banking and insurance to the national product would automatically increase as is experienced in India.
  5. The study of per capita distribution of GDP in agricultural and non-agricultural sectors indicates that over four decades the per capita distribution is more in the case of non-agricultural sector than the agricultural sector. The reasons for this are that, (1) the growth rate is high in the non-agricultural sector than in the agricultural sector and (2) as the population increases, there is no significant shift taking place from the agricultural to non-agricultural sector.
  6. Share of the rural and urban sector to NDP is also used to understand the composition of NDP. In Indian case, the contribution by the urban sector to NDP is very much higher than that of the rural sector. Similarly the per capita income in the rural and urban sectors in terms of ratio shows that the per capita income was high in the urban sector and low in rural sector.

The conceptual confusions associated with national income estimation have not been cleared satisfactorily and so the estimation process is subjected to various interpretations. Apart from these the following limitations are also found in the National income estimation:

  1. The existence of non-monetized sector and the output flowing from it has remained outside the computation of national income. In Indian case, in the agricultural sector the barter system still continues that a sizable quantity of produce does not enter into the market system at all. For example, the wages paid in kind itself is substantial quantity and it is not included in the valuation process.
  2. Lack of data relating to the income of small producers and household enterprises is yet another serious limitation. Most of the households engage in alternative occupation and the income earned through that is never accounted for. For example, the services of cook, household preparations of edible items, etc., are valuable but the income earned through such occupations is never known, similarly in the rural areas, the small producers never maintain details of income, expenditure and other data relating to their production. It is reasonable to expect that the income generated through these sources is substantial and when it is not included in national income the estimate of national income is very much less.
  3. Difficulty in differentiating the economic functions performed is yet another limitation in the estimation of national income. For example, an agricultural peasant during the season may work in his own field, and also in the farm yard of the neighbor during the off-season he may work at a match factory, or just rear cattle of others, etc. Then how to classify his income? The usual practice is to classify the income earned under industry origin, but with a sizable section of the people depending on agricultural sector where the occupation is seasonal, it is very difficult to estimate the income earned from various occupations.
  4. Existence of black money and unaccounted money is another major hurdle in the estimation of national income. Of course this problem is experienced by every country. With every possible increase in this category of income over the period, the estimation of national income is bound to be very much less.
  5. The compilation of data for national income estimation is taking place in a very loose manner. Usually the data at the village level are compiled by the village head man who may not collect these data in the scientific way in which it should be collected. Obviously the aggregation of these data will involve lot of inaccuracies. Further there is more than one official agency supplying the data which rarely tally. Another bad practice is to round off the data in an unscientific manner.  All these have serious implications on the data base for national income estimation.

On the whole, the national income estimation is subjected to the above limitations. Efforts are being taken at every stage to improve the estimation process, computerization of data, has been started only recently and with this a reasonable level of accuracy in the data can be expected. With these efforts, national income estimation should become satisfactory in future.