National Income of India

National income serves as a comprehensive metric indicating the total economic performance of a country, comprising the sum of the income earned by its citizens within a specific period. Thus, the concept of national income in economics is very important. In this article, you will learn about Definition and Meaning of National Income, Need for National Income Accounting and how to calculate National Income. It is very important topic for GS Paper-3 Economy of UPSC CSE Exam. To explore more interesting Class 12 Economics concepts similar to National Income, check out other articles of IASToppers. 

Table of Content

• What is National Income?
• Need for National Income Accounting
• Indicators to measure economic performance of a country
• Gross Domestic Product (GDP)
• Net Domestic Product (NDP)
• Gross National Product (GNP)
• Net National Product (NNP)
• Private Income
• Revised Method for National Income Accounting
• Limitations associated with computation method of National Income accounting in India
• Conclusion

What is National Income?

• National income of an economy refers to the sum of total income earned by the citizens of a country over a given time period, usually a year.
• In other words, National income is the net result of all economic activities of any country during a period of one year. National income includes payments made in the form of wages, interest, rent, and profits to all resources.
• National income is also known as national dividend, national output, and national expenditure.
• Measurement of national income can be done by various economic indicators such as GDP (Gross Domestic Product), GNP (Gross National Product), NNP (Net National Product) etc.
• National Income Accounting is set of methods used by the government to calculate national income and production of the economy during a specific time period.
• The Central Statistical Office under Ministry of Statistics and Programme Implementation prepares the national income estimate in India which is called National Account Statistics (NAS).
• In 1949, the National Income Committee was established to calculate India’s National Income and compile statistics in the post-independence period. The committee was led by PC Mahalanobis and included members D.R Gadgil and V.K.R.V Rao.
• The current base year used for calculation of national income is 2011-12.
• The difference between nominal and real national income is that Real national income, also known as National income at constant prices, is the value of national income after adjusting for inflation.
• The main source of India’s national income is India’s Service Sector.
  • The services sector of India contributed 53% to India’s Gross Value Added at current prices in FY21-22 (as per advance estimates).
• The father of national income accounting is Sir Richard Stone.

Need for National Income Accounting

Below are the need and importance for National Income Accounting:
 

• Clearly portrays a nation’s economic health and growth.
• Supports economic analysis and policy formulation in fiscal, monetary, and foreign trade sectors.
• Helps in comparing national income and per capita income of a country with those of other countries. This helps government in making suitable changes in policy plans.
• Throw light on distribution of factor incomes which is helpful to trade unions and other labour organizations for calculating labour wages.
• Tracks economic structural changes, such as shifts in agriculture and industry contributions.
• Predicts policy impacts on production and employment levels.
• Assists investors in evaluating financial market alignment with economic fundamentals.
• Facilitates economic planning of a country by providing key data on income, output, and savings.
• Helps research scholars of economics.
• Shows distribution of income in the country from which disparities in the incomes of different sections of the society can be deciphered.

Indicators to measure economic performance of a country

Below are the national income and related aggregates. These are basically various methods and formulas used for measuring and calculating national income. 

Gross Domestic Product (GDP)

• It is the final value of the goods and services produced within the geographic boundaries of a country during a specified period of time, normally a year.
• The GDP calculation includes income of foreigners in a country (but not the income of those people who are living outside of that country).
• The government releases quarterly GDP every two months, and the final numbers for the whole year are issued on May 31^st.

GDP can be calculated by three methods:

i) Value Added Method of National Income:

• It measures the monetary or market value of all the goods and services produced within country.
• It is also known as Output Method of National Income OR Production Method of National Income OR Product Method of National Income.

GDP (as per output method) = Real GDP (GDP at constant prices) – Taxes + Subsidies

ii) Expenditure Method of National Income:

• It measures the total expenditure incurred by all entities on goods and services within the country.

GDP (as per expenditure method) = C + I + G + (X-IM)

Here, C is Consumption expenditure, I is Investment expenditure, G is Government spending and (X-IM) is Exports minus imports or Net exports.

iii) Income Method of National Income:

• It measures the total income earned by the factors of production, that is, labour and capital within the country.

GDP (as per income method) = GDP at factor cost + Taxes – Subsidies

GDP OR National Income at Factor Cost

• GDP at factor cost is the cost to businesses to employ the various factors of production.  This is also termed as factory priceor production cost/price. This is nothing but price of the commodity from the producer’s side.
• GDP at market prices is the prices consumer will pay for the goods on the market.
• The difference between GDP at factor cost and market prices is subsidies and taxes levied by the Government.

GDP at Factor Cost = GDP at Market Price – Indirect Taxes + Subsidies

Benefits of GDP:

• Broad indicator of development
• Easy to measure growth in percentage
• Easy to compare to itself and other countries
• Good way for governments to know whether economic policies have been successful, and to what extent they have or have not been.
• Investors take help of GDP data before investing in a country as high GDP represents industrial development.

Drawbacks of GDP:

• Doesn’t include informal sector activity or the activity on the ‘black’ market.
• Doesn’t account income-inequality as well as environmental impacts of the economic policies.
• Doesn’t account for quality of goods. Consumers may buy cheap, low-quality, products repeatedly. Over time, consumers will have to spend more replacing cheap goods due to its short life and GDP would grow as a result of waste and inefficiency.
• Doesn’t take into account profits earned by overseas companies that are sent back to foreign investors. This can overstate a country’s actual economic output.
• Considered as a Narrow indicator that fails to show quality of life, standard of living, happiness, health care, political freedom, unemployment and quality of goods and services.
• Can be misleading depending on the population of a country.
  • A country with high population may have a high GDP value just because of the vast number of people who engage in economic activity.

Net Domestic Product (NDP)

• NDP is the GDP calculated after adjusting the value of depreciation.

NDP = GDP – Depreciation

• In India, Ministry of Commerce and Industry announce the rates by which assets depreciate which is used to determine depreciation levels in different assets.
• Depreciation is also used in economics in the external sector while the domestic currency floats freely as against the foreign currencies.
  • If the value of INR falls in comparison to US Dollar, it is a situation of depreciation in the INR (domestic currency).

NDP can be used to:

• Understand the historical loss due to depreciation in the economy as well as to understand sectoral situation of depreciation in comparative periods.
• Visualize the achievements of the economy in research and development domain, which have tried to reduce the l depreciation levels in a historical time period.

NDP is not used to compare the economies of the world as different depreciation rates in different countries.

Gross National Product (GNP):

• It is basically the GDP of a country added with its income from abroad.

The income from abroad includes:

i) Private Remittances: 

• Remittance refers to money that is sent or transferred to another party, usually overseas.
• In context of India, these are money transfers (remittance) from non-resident Indians (NRIs) employed outside the country to family, friends or relatives residing in India.

Private Remittances = Private transfers by Indian nationals working outside of India to India – Private transfers by foreign nationals working in India to their home countries

ii) Interest on External Loans:

Interest on External Loans = Interest generated (inflow) on the money lend out by a country – outflow of the money (interest paying) borrowed by a country

iii) External Grants:

• It is net outcome of the external grants which is difference between inflow and outflow of such grants to and from India.

However, GNP does not include:

• Any income earned in India by foreign residents or businesses,
• Products manufactured in the country by foreign companies.

GNP can be used to:

• Get a broader picture of the economy as it indicates quantitative (internal)as well as the qualitative (external) aspects of the economy;
• Reveal information about the net flow of its balance of trade, standard of human resource in international parlance (shown by private remittances); status of financial support from world economies (shown by external lending/borrowing).

Net National Product (NNP)

NNP =Gross national product (GNP) – Depreciation OR NNP = GDP + Income from Abroad – Depreciation

Different uses of the concept of NNP:

• It represents the National Income (NI) of an economy.
• It is considered as the purest form of the income of a nation.
• One can calculate the per capita income (income per head per year) by dividing the NNP by the total population of a nation.

Domestic Product:

• Income generated (or earned) by factors of production (i.e., inputs needed for creating goods, land, labour, capital and Entrepreneurship) within the country from its own resources is called domestic income or domestic product.

This includes:

• Wages and salaries,
• Rents, including imputed house rents,
• Interest,
• Dividends,
• Undistributed corporate profits, including surpluses of public undertakings,
• Mixed incomes consisting of profits of unincorporated firms, self- employed persons, partnerships, etc., and
• Direct taxes

Below charts shows the recent trends of National Income in India.

Private Income

• It is income obtained by private individuals and the retained income of corporations.
• It can be calculated from NNP at Factor Cost by making certain additions and deductions.
  • Additions are: Transfer payments such as pensions, unemployment allowances, sickness and other social security benefits, gifts and remittances from abroad, and interest on public debt.
  • Deductions are: Income from government departments and surpluses from public undertakings, and employees’ contribution to social security schemes like provident funds, life insurance, etc.

Private Income = National Income (or NNP at Factor Cost) + Transfer Payments + Interest on Public Debt — Social Security — Profits and Surpluses of Public Undertakings

Personal Income:

• It is the total income received by the individuals of a country from all sources before payment of direct taxes in one year.

Personal Disposable Income:

• Disposable income or personal disposable income is actual income (after deducting taxes) which can be spent on consumption by individuals and families.

Disposable Income = Personal Income – Direct Taxes

Real Income, Real NNP and Real GDP:

• Real income is national income expressed in terms of a general level of prices of a particular year taken as base.
• It is possible that the net national product of goods and services this year might have been less than that of the last year, but owing to an increase in prices, NNP might be higher this year and vice versa. To rectify such a mistake, the concept of real income has been evolved.
• Real NNP = NNP for the Current Year x Base Year Index (=100) / Current Year Index
• Real GDP = GDP for the Current Year x Base Year Index (=100) / Current Year Index
  • Nominal GDP: When GDP is measured on the basis of current price
  • Real GDP: When GDP is calculated on the basis of fixed base year prices

Revised Method for National Income Accounting

In January 2015, Central Statistics Office released revised data of National Accounts by making two major changes:

1. Based on the recommendation of the National Statistical Commission (NSC), the Base Yearwas revised from 2004–05 to 2011–12.

2. Methodologyof calculating the National Accounts was revised in line with the requirements of the System of National Accounts (SNA)-2008, an internationally accepted standard.

Major changes incorporated in this revision are:

• Decided to calculate GDP at ‘Market price’ instead of ‘Factor cost’.
• Comprehensive coverage of Corporate Sector has been ensured in mining, manufacturing and services by incorporation of annual accounts of companies as filed with the Ministry of Corporate Affairs (MCA) under their e-governance initiative, MCA21.
• Coverage of financial sector was expanded by including stock brokers, stock exchanges, asset management companies, mutual funds and pension funds, as well as the regulatory bodies, SEBI, PFRDA and IRDA.
• Improved coverage of local bodies and autonomous institutions, covering around 60% of the grants/transfers provided to these institutions.

Limitations associated with computation method of National Income accounting in India

Below are the difficulties and problems encountered while calculating national income:

• Problems of Double Counting: Double counting implies the possibility of a commodity like raw material or labour being included in national income more than once.
  • Example: a farmer sells maize worth rupees two hundred to a mill-owner, the mill owner further sells the maize flour to a wholesale dealer, who further sells it to consumer at Rs. 800. Here, money increase to Rs. 800 but actual increase in national income is Rs. 200.
  • So Double Counting is avoided to make correct estimate of national income.
• Excluded market transactions: All domestic transfer payments (personal, private and government), Second-hand Salesand Capital Gains are not included from national income of a country.
• Problem of Imputed Values: There are certain goods and services which do not appear in or cannot be brought to the market. In such cases, we have to impute values to them. This includes crops raised on the farm and consumed by the farmer on the farm, services rendered by commercial banks and other financial institutions, benefits like free residence enjoyed by the well-paid top business executives etc.
• Self-employed Persons: It is very to find out the different inputs provided by the Self-employed Persons. He might be contributing his capital, land, labour and his abilities in the business. But it is not possible to estimate the value of each factor input to production.
• Valuation of Government Service: It is difficult to find the true values of free Government services (which are included in the calculation) since these are not sold through the market.
• Inventory adjustments: i.e., changes in the stocks are taken into account while computing national income. Due to change in the physical volume of inventories and their prices, inventory valuation adjustment becomes essential. However, all business units do not keep a record of the changing inventories.

Conclusion

Accurate calculation of India’s national income is crucial for understanding the country’s economic health, informing policy decisions, and fostering growth. Utilizing indicators such as GDP, NDP, GNP, and NNP helps provide a comprehensive understanding of the economy. However, to over challenges, the Indian government should continue refining its national income accounting methodologies and expand data collection to ensure greater accuracy and representation

Ref: Source-1

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