National income accounting

FOR estimating national income, India follows the methodology suggested by the
United Nations. This, however, is more suitable for developed countries rather than
for underdeveloped ones, which are largely characterized by non-monetized and
unorganized sectors. The enterprises in underdeveloped economies produce at
subsistence levels and are functionally undifferentiated. In addition to producing
agricultural commodities, they take to other avocations (non-agricultural) during off-
season and do not keep proper records of their secondary and primary inputs of
production.

Small capital assets, which may not be very important for a developed economy _
and therefore excluded from fixed capital investment _ are crucial for
underdeveloped ones. In India, estimating the imputed value of rent of owner-
occupied dwellings is a difficult task.

The expenditure method cannot be used where markets are unorganized. The
production method cannot also be used for unorganized sectors such as small-scale
industries, trade and transport, and so on. Different methods are used to measure
the income generated by various sectors of the economy. For calculating national
income, the Indian economy is divided into 14 broad sectors, which are then grouped
into three main categories _ A, B and C.

Agriculture, forestry and logging, fishing, mining and quarrying, registered

manufacturing and construction are included in category A. The production method is
applied to category A. The value added by this category is found by subtracting the
value of raw materials and other inputs from the aggregate of commodity-wise
output. Electricity, railways, air transport, water and organized transport,
communications, banking and insurance, real estate, public administration and
defense are included in category B.

For category B, the income method is applied and, for this, all the types of factor
incomes which are reported in the annual accounts of various organizations are
aggregated. In category C, gas and water supply, unorganized roads and water
transport, storage, trade, hotels and restaurants, ownership of dwelling and other
services are included. For this category, sample surveys are done periodically to find
out the average productivity of labours.

Estimates of the workforce are interpolated or extrapolated and periodical

computations of average productivity are carried forward or backward by using
certain indicators. The year-to-year estimates of workers and their average
productivity so derived a re then multiplied to arrive at the estimates of value added.

Consumption takes place with income generation. The problem, however, is that of
deciding at which stage national income should be estimated.
Another problem relates to the commodities and services that should be included in
national income estimation. In fact, there are many goods and services which have
no money payments. Services that are rendered out of love, courtesy or kindness
have an e economic value but no money value. Therefore, the problem of their
inclusion and computation remains.

In India, conditions not only differ among States but also within each State.
Information based on samples taken from a few districts in a State may or may not
be valid for the whole State. There is, therefore, the need for making the data on
States more comprehensive.

Also, the occupational distribution of working population in India is widely dispersed.

Agricultural income that is consumed, small restaurants, tea-shops, and so on, along
with barter exchanges, pose problems of computation. Most of the farmers cultivate
e only one crop a year and have the tendency to accept alternative work in the
unorganized sector. Multiple sources of earnings make data collection difficult.

India's national income growth

The real national income of India has increased at an annual average rate of 3.8 per
cent in the 45 years of economic planning. In the last 14-15 years, the average
annual rate of increase has been 4.2 per cent. Though this seems good, it pales
when comp ared with those achieved by China and South Korea.

Right or wrong?

State with reasons whether the following statements are true or false:

National income accountants follow uniform concepts.

Incorrect. They often differ over the treatment of raw materials, intermediate goods
and depreciation. For example, whether government services are final (as they add
to the satisfaction level) or intermediate (as they are essential for economic
activity ). In India, these are treated as final services; in Russia, however, these are
considered intermediate.

Inadequate data is the main hurdle in national income accounting.

Correct. Adequate data regarding output, raw materials, and so on, are often not
available from many proprietorships, partnerships, non-profit institutions and
governments. Lack of adequate and reliable data is a major hurdle to the
measurement of nation al incomes of underdeveloped countries.

In India, a large portion of the agricultural output does not enter the market and is
retained either for barter or self-consumption. There is no means of estimating the
volume and value of goods which do not enter the market for exchange or which are
ex changed under barter.

Income method of accounting is not suited for developing countries.

Correct. The income method is more suitable for developed economies, as majority
of the people file their income-tax returns. In developing countries, a large
proportion of the national income is estimated by the expenditure method. The
income method is not suitable owing to the prevalence of non-monetized
transactions.

There are no conceptual problems in income accounting.

Incorrect. There are two types of difficulties in the estimation of national income.
One is conceptual and the other, statistical. The conceptual problem relates to the
definition of the various concepts and the terminology used _ for instance, the defin
ition of nation for computing national income, the method employed, the stage of
economic activity at which national income is to be calculated and the type of
commodities and services which are to be taken into account.

National income does not necessarily refer to income produced within the borders of
a country. The concept of national income extends beyond a nation's political
boundaries.

Income accounting has a bearing on exchange determination too.

Correct. GDP and the obtaining currency, and so on, play a role in exchange-rate
determination. Exchange rates vary depending on the domestic products and the
currencies chasing the total of such products. Further, the demand and supply
principles play a major role. However, the role of GDP in determining exchanges
rates though small cannot be ignored.