New Method of Calculating GDP by Govt in

India
What is gross value added (GVA)?
GVA is defined as output minus intermediate consumption. It is a balancing item of the
national accounts' production account.

What is gross value added (GVA)?

GVA is defined as output minus intermediate consumption. It is a balancing item of the

national accounts' production account.

Since the Narendra Modi government took over in May 2014 it advocated abandoning the old
way of gauging economic growth - that is through gross domestic product (GDP). And in in
January 2015, that is 7-months after coming to power, the new measure came into effect.

Now, the GDP growth data is calculated under the new methodology (GDP at market prices).

Another parameter that has been introduced is the gross value added or the GVA which
represents the contribution of capital and labour in the production process.

GVA is defined as:

1) Output minus intermediate consumption. It is a balancing item of the national accounts'

production account.

OR in simpler terms

GDP = GVA + taxes on products - subsidies on products

OR

GVA = GDP - taxes on products + subsidies on products

2) Simplifying it further, wikipedia defines GVA as the grand total of all revenues, from final
sales and (net) subsidies, which are incomes into businesses. Those incomes are then used to
cover expenses (wages and salaries, dividends), savings (profits, depreciation), and (indirect)
taxes.

3) GVA is used to estimate or assess the Gross Domestic Product (GDP). When using income
or production approaches, contribution of each and every sector to the economy is measured
using GVA.

4) It is further divided into GVA at basic prices and GVA at Factor Costs .
i. GVA at basic prices includes production taxes and excludes production subsidies available
on the commodity.

ii. GVA at factor cost on the other hand includes no taxes and excludes no subsidies.

The UN System of National Accounts (2008) uses two kinds of prices to measure output -
basic prices and producers’ prices:

Producer’s price is the amount receivable by the producer from the purchaser for a unit of a
good or service produced as output minus any VAT, or similar deductible tax, invoiced to the
purchaser. It also excludes any transport charges invoiced separately by the producer.

Gross Value Added (GVA) at basic prices

and GVA at Factor Costs
Gross Value Added (GVA) Vs. GDP
Gross value added (GVA) is defined as the value of output less the value of intermediate
consumption. Value added represents the contribution of labour and capital to the production
process. When the value of taxes on products (less subsidies on products) is added, the sum
of value added for all resident units gives the value of gross domestic product (GDP). Thus,
Gross Domestic Product (GDP) of any nation represents the sum total of gross value added
(GVA) (i.e, without discounting for capital consumption or depreciation) in all the sectors of
that economy during the said year after adjusting for taxes and subsidies.

Introduction of GVA at basic prices in India

In India, GDP is estimated by Central Statistical Office (CSO). Under the Fiscal
Responsibility and Budget Management Act 2003 and Rules thereunder, Ministry of Finance
uses the GDP numbers (at current prices) to peg the fiscal targets. For this purpose, Ministry
of Finance makes their own projections about GDP for the coming two years while
specifying future fiscal targets.

In the revision of National Accounts statistics done by Central Statistical Organization (CSO)
in January 2015, it was decided that sector-wise wise estimates of Gross Value Added (GVA)
will now be given at basic prices instead of factor cost. In simple terms, for any commodity
the basic price is the amount receivable by the producer from the purchaser for a unit of a
product minus any tax on the product plus any subsidy on the product. However, GVA at
basic prices will include production taxes and exclude production subsidies available on the
commodity. On the other hand, GVA at factor cost includes no taxes and excludes no
subsidies and GDP at market prices include both production and product taxes and excludes
both production and product subsidies.

The relationship between GVA at Factor Cost and GVA at Basic Prices and GDP at market
prices and GVA at basic prices is shown below:
 GVA at factor cost + (Production taxes less Production subsidies) = GVA
at basic prices
GDP at market prices = GVA at basic prices + Product taxes- Product
subsidies

Production taxes or production subsidies are paid or received with relation to production and
are independent of the volume of actual production. Some examples of production taxes are
land revenues, stamps and registration fees and tax on profession. Some production subsidies
include subsidies to Railways, input subsidies to farmers, subsidies to village and small
industries, administrative subsidies to corporations or cooperatives, etc. Product taxes or
subsidies are paid or received on per unit of product. Some examples of product taxes are
excise tax, sales tax, service tax and import and export duties. Product subsidies include food,
petroleum and fertilizer subsidies, interest subsidies given to farmers, households, etc.
through banks.

The concept of GVA at basic prices follows from the United Nation's System of National
Accounts (SNA) introduced in 1993 and carried forward in an identical fashion in SNA 2008
as a part of revision of compilation and classification systems. This has been adopted by CSO
in its base revision carried out in January 2015.

GVA at Basic Price Vs Producers' Price Vs Factor Costs as in The UN System of

National Accounts (2008)
In the SNA, intermediate inputs are valued and recorded at the time they enter the production
process, while outputs are recorded and valued as they emerge from the process. (The
difference between the value of the intermediate inputs and the value of the outputs is gross
value added.)

More than one set of prices may be used to value outputs and inputs depending upon how
taxes and subsidies on products, and also transport charges, are recorded. Moreover, value
added taxes (VAT), and similar deductible taxes may also be recorded in more than one way.
Intermediate inputs are normally valued at purchasers’ prices and outputs at basic prices, or
alternatively at producers’ prices if basic prices are not available.

Thus the SNA utilizes two kinds of prices to measure output, namely, basic prices and
producers’ prices:

 The basic price is the amount receivable by the producer from the purchaser for a unit of a
good or service produced as output minus any tax payable, and plus any subsidy receivable,
by the producer as a consequence of its production or sale. It excludes any transport charges
invoiced separately by the producer.
 The producer’s price is the amount receivable by the producer from the purchaser for a unit
of a good or service produced as output minus any VAT, or similar deductible tax, invoiced to
the purchaser. It excludes any transport charges invoiced separately by the producer.

Basic prices exclude any taxes on products the producer receives from the purchaser and
passes on to government but include any subsidies the producer receives from government
and uses to lower the prices charged to purchasers. Both producers’ and basic prices are
actual transaction prices that can be directly observed and recorded. The basic price measures
the amount retained by the producer and is, therefore, the price most relevant for the
producer’s decision-taking. The basic price is obtained from the producer’s price by
deducting any tax on products payable on a unit of output (other than invoiced VAT already
omitted from the producer’s price) and adding any subsidy on products receivable on a unit
of output. In consequence, no taxes on products or subsidies on products are to be recorded as
payables or receivables in the producer’s generation of income account when value added is
measured at basic prices, the preferred valuation basis in the SNA.

Gross value added at basic prices is defined as output valued at basic prices less
intermediate consumption valued at purchasers’ prices. Here the GVA is known by the price
with which the output is valued. From the point of view of the producer, purchasers’ prices
for inputs and basic prices for outputs represent the prices actually paid and received. Their
use leads to a measure of gross value added that is particularly relevant for the producer.

Gross value added at producers’ prices is defined as output valued at producers’ prices less
intermediate consumption valued at purchasers’ prices. In the absence of VAT, the total value
of the intermediate inputs consumed is the same whether they are valued at producers’ or at
purchasers’ prices, in which case this measure of gross value added is the same as one that
uses producers’ prices to value both inputs and outputs. It is an economically meaningful
measure that is equivalent to the traditional measure of gross value added at market prices.
However, in the presence of VAT, the producer’s price excludes invoiced VAT, and it would
be inappropriate to describe this measure as being at “market” prices.

By definition, the value of output at producers’ prices exceeds that at basic prices by the
amount, if any, of the taxes on products, less subsidies on products so that the two associated
measures of gross value added must differ by the same amount.

Gross value added at factor cost is not a concept used explicitly in the SNA. However, it
can easily be derived from either of GVA at basic prices or GVA at producer's price by
subtracting the value of any taxes on production and adding subsidies on production, payable
out of gross value added as defined. For example, the only taxes on production remaining to
be paid out of gross value added at basic prices consist of “other taxes on production” which
are not charged per unit. These consist mostly of current taxes (or subsidies) on the labour or
capital employed in the enterprise, such as payroll taxes or current taxes on vehicles or
buildings. Gross value added at factor cost can thus be derived from gross value added at
basic prices by subtracting other taxes on production and adding subsidies on production.

The conceptual difficulty with gross value added at factor cost is that there is no observable
set of prices such that gross value added at factor cost is obtained directly by multiplying this
set of prices by the sets of quantities of outputs. By definition, other taxes or subsidies on
production are not taxes or subsidies on products that can be eliminated from the input and
output prices. Thus, despite its traditional name, gross value added at factor cost is not strictly
a measure of value added; it is essentially a measure of income and not output. It represents
the amount remaining for distribution out of gross value added, however defined, after the
payment of all taxes on production and the receipt of all subsidies on production. It makes no
difference which measure of gross value added is used to derive this income measure because
the alternative measures of value added considered above differ only in respect of the
amounts of the taxes or subsidies on production that remain payable out of gross value added.
 Different prices coming into GVA estimations
= Purchasers' price (or the
price at which that product is
being sold in the market)
(-) wholesalers' & retailers'
margins
(-) separately invoiced
Transport Charges
(-) VAT not deductible by the
purchaser
= Producers' Price
(+) subsidies on the product
(-) taxes on the product
excluding invoiced VAT
= Basic Price
(-) Production Taxes
(+) Production Subsidies
= Factor Costs

Deriving GDP from the GVA

From these various concepts of GVA, one can arrive at an estimate of GDP in the following
manner:

a. GDP = the sum of the gross value added at producers’ prices, plus taxes on imports, less
subsidies on imports, plus non-deductible VAT.
b. GDP = the sum of the gross value added at basic prices, plus all taxes on products, less all
subsidies on products.
c. GDP = the sum of the gross value added at factor cost plus all taxes on products, less all
subsidies on products, plus all other taxes on production, less all other subsidies on
production.

In cases (b) and (c), the items taxes on products and subsidies on products includes taxes and
subsidies on imports as well as on outputs.