The following points highlight the four major problems in measuring national income of a developing country. The problems are: 1. Lack of Reliable Data 2. Existence of Non-Monetised Sector 3. Difficulties in the Classification of Working Population 4. Defective Methods Used for Deflating Domestic Product Series.
Problem # 1. Lack of Reliable Data:
The reliability of data relating to national income is often questioned in India. National income estimate is made on the basis of primary data relating to incomes and values of goods produced. In India, this is so due to the fact that many producers, particularly small- scale units, do not maintain any accounts relating to their incomes or goods produced in a financial year.
Obviously, the primary data collected from this sector are supposed to be vague. The main reason behind this seems to mass illiteracy. Furthermore, people are reluctant to co operate with the data collectors. Above all, data collectors often ‘fabricate’ whatever little information they get. They do not bother to approach the producing sectors. If this information is considered as the basis of judgment, then the judgment will suffer from inaccuracy.
Problem # 2. Existence of Non-Monetised Sector:
In India, the soundness of national income estimate often put to question due to existence of a large non-monetised sector. This very fast creates a serious valuation problem. One witnesses the existence of an unorganised barter economy in rural India where money is not used. In such a situation, the problem of valuation of goods produced crops up.
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Furthermore, our farmers retain a major part of their production for self-consumption. Naturally, a large portion of output does not come into the market at all and is not subjected to the valuation process. By imputing values to these goods, the problem of valuation can be partly solved. But, considering the vastness of the country, such imputation is no doubt a stupendous task. Even if imputation is possible it is not very much reliable.
Problem # 3. Difficulties in the Classification of Working Population:
In India, working population is not very clearly defined. Agriculturists in India are not engaged in farming round the year. Obviously, in the off-season, they engage themselves in alternative occupations. Thus, the data relating to the people engaged in different occupations is bound to be unsatisfactory. Consequently, different sources of income become undefined.
Problem # 4. Defective Methods Used for Deflating Domestic Product Series:
Reliability of estimates of rates of growth of real national income (domestic product at constant prices) depend on how the various sectoral incomes obtained in money terms are deflated. A biased estimate of rates of growth in income is likely to appear if deflator is not properly conceived or constructed.
Sometime back, M. M. Dadi has shown that the CSO uses a ‘a double deflation’ method of obtaining value added at constant prices in case of the agricultural sector, but not in the manufacturing sector. He has suggested that a deflator of value added in the manufacturing is to be devised. According to him, wholesale price index (WPI) is the most relevant. But CSO’s manufacturing price index is erroneous and misleading. The CSO method gives an over-estimate to the rates by 0.43 and 0.80 points for the old and new series, respectively.
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Conclusion:
In view of these problems and limitations, estimation of national income of India is not an easy task. However, conscious efforts are being constantly made to improve the methodology of estimation.