Difficulties Regarding the Measurement of National Income in India

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In under-developed countries like India, we face some special difficulties in estimating national income.

Some of these difficulties are given below:

(i) The first difficulty arises because of the prevalence of non-monetized transactions in under-developed countries like India, so that a considerable part of output does not come into the market at all. Agriculture still being in the nature of subsistence farming in these countries, a major part of output is consumed at the farm itself. The national income statistician, therefore, has to face the problem of finding a suitable measure for this part of output.

(ii) Because of illiteracy, most producers have no idea of the quantity and value of their output. They do not follow the practice of keeping regular accounts. This makes the task of getting reliable information from a large number of petty producers all the more difficult.

(iii) Because of under-development, occupational specialization is still incomplete so that there is a lack of differentiation in economic functioning. An individual may receive income partly from farm ownership, partly from manual work in industry in the slack season, etc.

(iv) There is a general lack of adequate statistical data and this makes the task of estimation all the more difficult.

(v) It is not easy to calculate the value of inventories, i.e., raw materials, semi-finished and finished goods in the custody of the producers. Obviously, any miscalculation on this score will vitiate the estimates of the output of productive enterprises.

(vi) The calculation of depreciation on capital consumption presents another formidable difficulty. There are no accepted standard rates of deprecia­tion applicable to the various categories of machines. Unless from the gross national income correct deductions are made for depreciation, the estimate of net national income is bound to go wrong.

(vii) Then there is the difficulty of avoiding double counting. If the value of the output of sugar and sugarcane are counted separately, the value of the sugarcane utilized in the manufacture of sugar will have been counted twice. This must be avoided.

(viii) The application of the expenditure method too is full of difficulties. It is difficult to estimate all personal as well as investment expenditure.

Special Difficulties of Measurement in Underdeveloped Countries:

The estimation of national income in any country is a very difficult task. But in under-developed countries like India, the difficulties are particularly great.

The chief among them are as follows:

(i) Lack of Reliable Statistics:

The most serious handicap is the inade­quacy, non-availability and unreliability of statistics. Correct statistical infor­mation regarding agriculture and allied occupations is not available. There is also no information available regarding consumption, expenditure and savings of either rural or urban population. Besides, owing to regional diversities, statistics available about one region cannot be used for another region.

(ii) Absence of Proper Accounts:

Illiteracy of the people and the absence of the practice of keeping accounts is the next. In western countries, economic statistics are collected directly from individuals and enterprises. This is obviously not possible in India. Moreover, Indian people are by tradition suspicious and do not co-operate in the collection of data.

(iii) Inability to Estimate:

Besides, most of the Indian producers are not capable of working out the exact quantity and the value of their products. Thus, “an assessment of output, produced by self-employed agriculturists, small producers and owners of household enterprises in the un-organised sector, would require an element of guess work.”

(iv) Unorganized Production:

For the most part, production, both agricul­tural and industrial, is unorganized and scattered. Thus, it does not admit of easy calculation. This also applies to household crafts.

(v) Lack of proper Classification:

A major part of the Indian economy consists of household enterprises which perform simultaneously functions belonging to different occupational categories. Thus the usual industrial classification cannot be observed.

(vi) Lack of Uniform Basis:

Another difficulty is the absence of a uniform basis which could be used for evaluating commodities and services in terms of money. This is made more difficult by the fact that a considerable portion of the output in India does not come into the market at all; it is either consumed by the producers themselves or bartered for other commodities and services. The large unorganized and non-monetized sector of the Indian economy presents the great difficulty in national income calculations.

(vii) Lack of Common Denominator:

Lastly, there is the universal academic difficulty of reducing the numerous economic activities of millions of people to a common measurable denominator. For example, how to add together the services of a street sweeper and those of the Prime Minister?

Uses of National Income Data:

Modern Governments take unusual pains in the collection of national income data for a number of reasons. Raising national income is the important goal of all economic activity. Economic welfare of a country depends upon what goods and services are made available for the consumption of its people.

The following are the main uses of national income statistics:

(i) National income data are used to measure economic welfare of the community. Other things being equal, economic welfare is greater if national income is greater.

(ii) National income figures give us an idea as to the standard of living of a community.

(iii) The national income figures are further useful in helping us to assess the pace of economic development of a country. If they do not measure progress precisely, at least they will show us the trends.

(iv) The study of national income statistics is also useful in diagnosing the economic ills of a country and suggesting remedies.

(v) The national income data are used to assess the saving and investment potential of the community. The rate of saving and investment is ultimately dependent on the national income.

(vi) We can make inter-temporal comparisons, i.e., comparisons between two periods of time in the country in order to form an idea of the economic conditions prevalent in the respective periods.

(vii) We can also make inter-country comparisons by taking the national income data of two countries. This will help us to know where we stand among the world economies.

(Viii) National income data also enable us to assess inter-sectoral growth of an economy. This information is useful in planning development of the various sectors.

(ix) The national income data also offer a reasonable basis for forecasting future economic events. This will enable a country to foresee the probable results of a particular economic policy.

(x) Another use of the national income estimates is that they throw light on inter-class distribution of national income. One can judge the standard of welfare of the various sections of the community. All modern societies aim at reducing inequalities of incomes and this is not possible without the aid of national income data.

(xi) Above all, the national income data are used for planned economic development of the country. In their absence all planning will be a leap in the dark.

In. Samuelson’s words, “By means of statistics of national income, we can chart the movements of a country from depression to prosperity, its steady long-term rate of economic growth and development, and finally, its material standard of living in comparison with other nations.”

Limitations of National Income Accounts:

There is no doubt that the national income data are highly useful and even necessary for a modern society. But we should take care not to attach to them exaggerated importance. They cannot be taken as absolutely reliable nor can they be taken as an infallible guide to economic policy.

They suffer from certain limitations:

(i) They are only rough approximations with all the care taken and the expense incurred in their preparation. We have, therefore, to be very careful in their use.

(ii) The national income figures measure money incomes rather than real income. Any attempt at inflating or deflating money incomes in order to ascertain real income will create a host of other uncertainties.

(iii) Inter-temporal comparisons, i.e., comparisons between two differ­ent periods in the country are not possible. This is due to the fact that a number of changes must have occurred in the meantime to render the comparison meaningless.

(iv) Inter-country comparisons too are also not very fruitful. This is due to the fact that economic conditions of the two countries as well as the nature of goods and services that have entered into calculation may be widely different.

(v) The national income estimates do not justify any forecasting owing to a large measure of approximation in their calculation. On their basis we cannot say that a certain policy will produce the desired results.

Conclusion:

In spite of these limitations, the national income estimates serve a very useful purpose and improvement both in the data and in the techniques no doubt has added to their validity.