In India, the measurement of national income is carried out by the Central Statistical Office (CSO) under the Ministry of Statistics and Programme Implementation (MOSPI). The CSO prepares estimates of national income and related aggregates using a system of National Accounts Statistics (NAS).
The NAS in India follows the international standards recommended by the United Nations System of National Accounts (UNSNA). The NAS covers the entire economy, including agriculture, manufacturing, services, and the public sector. It provides estimates of Gross Domestic Product (GDP), Gross National Product (GNP), Net National Product (NNP), and National Income (NI).
The estimates of national income in India are prepared using both the production and expenditure approaches. Under the production approach, the total value of goods and services produced in the economy is estimated. Under the expenditure approach, the total expenditure on goods and services in the economy is estimated.
The production approach is used to estimate the Gross Value Added (GVA) in different sectors of the economy. The GVA is then adjusted for indirect taxes and subsidies to arrive at the GDP at market prices. The GDP at market prices is the sum of the value of all goods and services produced in the economy during a given period, including taxes and subsidies.
The expenditure approach is used to estimate the total expenditure on goods and services in the economy. The total expenditure is divided into four categories: private final consumption expenditure (PFCE), government final consumption expenditure (GFCE), gross fixed capital formation (GFCF), and net exports (exports minus imports). The sum of these categories gives the GDP at market prices.
Once the GDP at market prices is estimated, the NI is derived by subtracting depreciation and indirect taxes from GDP at market prices and adding subsidies. This provides a measure of the total income generated in the economy during a given period.
In addition to estimates of national income, the NAS also provides estimates of other related aggregates, such as savings, investment, and consumption. These estimates are used by policymakers to assess the performance of the economy and formulate economic policies.
It is worth noting that the measurement of national income in India is subject to some limitations and challenges. For example, the informal sector is a significant part of the economy, and it is difficult to obtain accurate data on its activities. Also, there are issues with the quality and reliability of data, particularly in some sectors of the economy. Nonetheless, the estimates of national income prepared by the CSO provide a useful measure of the overall economic performance of the country.
Components of national income in India include:
- Gross Value Added (GVA): The GVA is the value of goods and services produced in different sectors of the economy during a given period, less the cost of inputs used in the production process. It is the primary measure of economic activity at the sectoral level. The GVA is estimated for different sectors, including agriculture, industry, and services.
- Indirect Taxes: Indirect taxes are taxes that are levied on the production and sale of goods and services. Examples include excise duty, customs duty, and service tax. Indirect taxes are included in the price of goods and services and increase their final price. Therefore, they are subtracted from the GDP to arrive at the net value of goods and services produced in the economy.
- Subsidies: Subsidies are payments made by the government to producers or consumers to encourage the production or consumption of specific goods or services. Examples include subsidies on fertilizers, power, and food grains. Subsidies are added to the GDP to arrive at the gross value of goods and services produced in the economy.
- Depreciation: Depreciation is the reduction in the value of fixed assets, such as machinery and buildings, over time due to wear and tear or obsolescence. Depreciation is subtracted from the GDP to arrive at the net value of goods and services produced in the economy.
- Net Factor Income from Abroad (NFIA): Net factor income from abroad is the difference between the income earned by Indian residents from foreign sources and the income earned by foreign residents in India. If the income earned by Indian residents from foreign sources is higher than the income earned by foreign residents in India, NFIA is positive, and if it is lower, NFIA is negative.
- Direct Taxes: Direct taxes are taxes that are levied on the income and wealth of individuals and companies. Examples include income tax and corporate tax. Direct taxes are not included in the calculation of national income.
- Consumption: Consumption refers to the expenditure by households on goods and services. It includes expenditure on durable goods, non-durable goods, and services. Consumption is one of the components of GDP and is used to calculate the savings rate in the economy.
- Investment: Investment refers to the expenditure on capital goods, such as machinery and equipment, and the construction of new buildings. Investment is a crucial component of economic growth as it increases the productive capacity of the economy.
- Government Expenditure: Government expenditure includes expenditure on goods and services by the central and state governments. It includes expenditure on defense, education, health, and infrastructure. Government expenditure is a crucial component of GDP and is used to calculate the fiscal deficit in the economy.
Limitations and Challenges of National Income
While national income is a crucial measure of economic activity, there are some limitations and challenges associated with its calculation and interpretation. Some of these limitations and challenges include:
- Incomplete Coverage: National income estimates do not capture the entire economic activity of a country. Informal sectors, underground economies, and non-monetary transactions are often excluded from national income estimates. Therefore, the estimate may not accurately reflect the true economic activity of the country.
- Quality of Data: National income estimates rely on a large amount of data from various sources, and the quality of this data can vary significantly. Data errors, inconsistencies, and gaps can impact the accuracy of national income estimates.
- Defining Economic Activity: There are challenges in defining what constitutes economic activity and distinguishing between economic and non-economic activities. For example, the value of household work and volunteer work is not typically included in national income estimates.
- Price Fluctuations: National income estimates are often calculated at current prices, which can be affected by inflation and other price fluctuations. As a result, changes in national income may reflect price changes rather than changes in actual economic activity.
- International Comparisons: National income estimates from different countries may not be comparable due to differences in data sources, methods of calculation, and currency conversions. Therefore, international comparisons of national income may not be accurate.
- Environmental Costs: National income estimates do not account for the environmental costs of economic activity, such as pollution and resource depletion. These costs can have significant impacts on the sustainability of economic growth and need to be considered in a broader analysis of economic activity.
- Income Inequality: National income estimates do not provide information about the distribution of income within a country. High levels of income inequality can negatively impact economic growth, social cohesion, and other aspects of well-being.