NAME: ABHIGYAN SRIVASTAVA

DIVISION: MMS A

22nd August 2018 – Mint

“TO RAISE ₹10,500 CR, KERALA SEEKS HIKE IN BORROWING CAP”

Flood-ravaged Kerala has asked the centre to raise its borrowing limit from the present 3% of
state GDP to 4.5% as it looks to mobilize ₹10,500 crore for a mammoth reconstruction, part
of what chief minister Pinarayi Vijayan described as a comprehensive plan to build a “new
Kerala.”

The Government of Kerala would have calculated the state GDP in one of the following
ways.

Aggregate income generated in an economy is always equal to value of output produced in it,
and that is equal to expenditure incurred in it.

Aggregate income can be calculated through these approaches: -

1. Expenditure approach

It involves measuring the total spending on final goods and services produced within a
country during a given period of time. In this case it would be Kerala state.

Y= C+I+G+(X-M)
Y= Income
C= Consumption
It refers to expenditure on final commodities by private sector.
I= Investment
Investment can be by private sector as well as public sector.
G= Government
Expenditure by the government.
X-M= Net Exports
Exports refers to amount of expenditure by foreigners on domestically produced goods.
Imports refers to amount of expenditure by Indians on foreign produced goods.

2. Income approach
We can measure output by adding factor payments that firms make to factors of production.
Y= Wages + Rent + Interest +Profit

Wages are referred as compensation to employees whereas other three factors- Rent, Interest
and Profit are known as operation surplus.

3. Value Added Approach

It is also known as net product method. In this method value added at each stage of
production by a firm is taken into consideration.

Value Added by a firm = Value of output by each firm – Value of intermediate products
used by firm.

For ex.:- Production of Bread

It involves three stages: -

Farming of wheat – ₹150

Milling of wheat – It converts flour worth ₹200

Value added by miller is (200-100) = ₹100

Then the last step backing of bread i.e. breads worth ₹350

Value added by baker = (350-200) i.e. ₹150

So, income = 100 + 100 + 150

Y= ₹450.

Thus, the Government of Kerala would have calculated the state GDP in one of the above
ways, after which they would have decided the increase in percentage of borrowing limit to
4.5% of state GDP from 3% in order to mobilize ₹10,500 crore for reconstruction.