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Difficulties for Measuring India’s National Income | Economics

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In this article we will discuss about the difficulties for measuring India’s National income.

National income is the net value of all goods and services (national product) produced annually in a country.

It can be measured in three ways:

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(i) Firstly, it can be taken as the domestic product/output of goods and services produced by enterprise within the country. This is known as the value added method (approach) to GDP. The total output excludes the value of imported goods and services. To avoid double counting, and the conse­quent overstating the value of output, we count only the value added at each stage of the production process.

So, the gross domestic product is the sum of all the value added by various sectors of the economy (e.g., agriculture, manufacturing, etc.). However, to arrive at the gross national product it is necessary to add net factor (property) income from abroad. Such income accrues to a nation from its ownership of assets abroad.

(ii) Secondly, national income can be considered as the total income of residents of the country derived from the current production of goods and services. This is known as the income approach to GDP. Since such incomes accrue to factors of production, they are known as factor incomes. Such incomes exclude transfer payments like unemployment compensation or widow pension or sickness benefit for which no good or service is obtained in exchange.

The sum of all these factor incomes (wages and salaries, incomes of the self-employed, etc.) would be exactly equal to the GDP. It is so because each rupee worth of goods and services produced should simul­taneously generate Re. 1 of factor incomes for their production. To arrive at gross national factor incomes (= GNP) from gross domestic factor income (=GDP) it is necessary to add net property income from abroad.

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(iii) Thirdly, national income may be taken as the sum total of domestic expenditure by residents of a country on consumption and investment goods. This is known as the expenditure approach to GDP. This includes expenditure on final goods and services and excludes expenditure on raw materials and intermediate goods.

It also includes goods which remain unsold and added to stock (inventory investment). However, residents of a country also consume imported items and spend money on these. Likewise, foreigners spend some money on goods and services, produced by domestic residents. The latter will add to the factor income of these residents. Thus, to arrive at total national expenditure (=GNP) from total domestic expen­diture, it is necessary to deduct imports and add exports.

All the three methods outlined above show the gross money value of goods and services produced — the GNP. However, in the process of producing these goods and services, the nation’s capital stock will depreci­ate. So, from GNP we have to set aside a certain portion every year so as to provide for the wear and tear of capital. If we subtract depreciation from GNP or gross national income we arrive at NNP or net national income.

In India, the national income statistics are regularly published and pre­pared by the Central Statistical Organisation (CSO) of the Planning Commission as ‘white paper’. The CSO estimates national income by the product method on the commodity sectors. These are: agriculture, forestry and logging, fishing, mining and quarrying and large-scale manufacturing both registered and unregistered.

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The income method is usually employed in the services sectors, via small-scale manufacturing, electricity, gas and water supply, transport, storage and communication, trade, hotels and restaurants, housing and insurance, real estate and ownership of dwelling and business services, public administration and defence. Both commodity flow and expenditure methods are adopted for this construction industry. The former is used in urban construction and the latter is in rural construction.

The production method involves the measurement of physical output of the commodity producing sectors multiplied by the average price. From this gross value of output, intermediate consumption and consumption of fixed capital is deducted to get the net value added.

On the other hand, the income method involves finding out the work force in each sector and then multiplying it by the average earnings to get the gross value added. By deducting consumption of fixed capital from this figure, we arrive at the net figure. The expenditure method is employed in kutcha construction while the commodity flow method is employed in pucca construction.

Thus, the sum total of net value added at factor cost of all the sectors gives us the net domestic product (NDP) at factor cost. By adding net factor income from abroad to NDP at factor cost we obtain the figure for NNP at factor cost or the net national income in India.

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