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How GDP is Calculated in India?

IndianMoney.com Research Team | Updated On Monday, September 16,2019, 06:38 PM

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How GDP is Calculated in India?

 

 

While watching the national news we often come across the word GDP.  In newspapers also we often come across news stating India will grow at 8% GDP this year. Have you ever asked yourself what is GDP? Why is GDP so important and how does it affect the growth of a country? Let’s discuss it further to understand how it impacts the economic growth of a country:

What is GDP?

The GDP is the indicator of the economic health of a country. It is the measure of the country’s economic performance during a particular year. It is the sum total of all the economic activities and is calculated based on the final value of goods and services produced within the country. Thus we can conclude, that GDP represents the monetary value of the final goods and services produced within the country within a given time period. The Indian economy is dependent on the agriculture, manufacturing and services sectors and GDP growth is measured based on the wealth created by these sectors.

See Also: What is GDP?

How GDP is Calculated in India?

In India, the Ministry of statistics and program implementation is the government body responsible for the estimation of the GDP. The GDP estimated are made every quarter and published with a delay of two months. The annual GDP is published on 31ST May every year. The GDP is estimated as per the prevalent market prices of goods and services thus it automatically includes the price rise due to inflation.

The GDP of India is estimated using two different methods. They are:

Gross Value Addition Method:

Under this method, the final value of the goods and services are considered without taking into consideration the value of intermediary goods and services. The value of unfinished goods and products are not included in the calculation of GDP under this method to avoid double calculation. The value of the final goods is determined by considering the cost involved at each stage of production. This method is also known as products method or commodity service method.

The formula of value-added method: the value of output – intermediate consumption

The GDP calculation of the following industries are analysed using the value addition method:

  • Agriculture
  • Mining
  • Manufacturing and trade
  • Gas, electricity and water supply
  • Construction activities
  • Real estate, financial and professional services
  • Transport and communication
  • Services related to broadcasting
  • Public administration, defence and other services

Income method:

This method calculates the sum of all the producers’ incomes where the incomes of the productive factors are equal to the value of their product. The income approach formula of the GDP is as follows:

Total national income + sales tax + depreciation + net foreign income

Characteristics of the GDP of India

Since the Indian economy is largely based on agriculture, service and manufacturing so there are some characteristic features of the GDP of the country.

  • GDP takes into account the prices of the finished goods and services. It does not evaluate the cost of the intermediary process or the uses of the goods and services.
  • GDP is the calculation of the total output produced by the country. Thus while calculating the GDP in India, certain components like foreign direct investment, performance of debt and equity, and import and export performance play a crucial part.
  • GDP growth rate is always shown in real rate without taking into consideration the impact of inflation
  • The GDP of the country calculated periodically like quarterly or annually.
  • GDP measures the total economy of the country in the local currency of the country

GDP Formula:

GDP takes into account the market value of the goods and services produced by the country in a year/quarter. The following equation is used to calculate the GDP of India:

GDP = Consumption + Government spending + Investment + Net exports (Exports-Imports)

Where,

Consumption refers to the personal expenditures related to food, household, medical expenses, rent, etc. Consumption is a major indicator account for 60% of the GDP. 

Government spending means investment expenditure by the government. This includes all the expenditures made by the government in a particular year/quarter like payment of salaries, purchase of equipment for defence, spends on education, healthcare, and social protection, etc.

 Investments refer to the investment of capital into various components like the purchase of machinery and equipment, software, expenditure on buying goods and services. However, it excludes investment in financial products. This indicator accounts for 32% of the GDP.

Net exports refer to the number of goods exported minus the number of goods imported. Imported goods must be deducted from the calculation of GDP as it may lead to calculating the foreign supply as domestic supply.

GDP Growth Rate in India: Last 5 years:

We learnt how the GDP of India is calculated. But why is this important? The gross domestic product (GDP) is one of the primary indicators that are used to measure the progress of our country’s economy.

A GDP of 8% or more for India will mean India is growing at a good pace. If the GDP remains constant at 8% each year then it means the economy is generating more employment. Hence the per capita income increases and there is more number of people whose standard of living becomes better.

Hence it is very important to make GDP growth widespread. GDP growth should be a result of growth across all sectors of the economy i.e. agriculture, manufacturing and services. The agricultural sector accounts for 17% of the GDP, the manufacturing services consists of 23% of the GDP and the biggest contributor is the services sector that accounts for 60% of the GDP.

The last quarter of 2017-18 registers growth in the GDP of 7.7% which indicated that India is the fastest-growing economy in the world. However, the GDP growth in 2019 is 6.2% that indicated an economic slowdown. The change in the GDP does affect the economy but the effect of the economic growth takes time to be felt.

See Also: 5 Things Modi 2.0 Can Do To Boost The Economy

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