NATIONAL INCOME-2

By Jatin Verma in association with

Unacademy
Changes in GDP Methodology
• In the previous class, we discussed that, CSO has
upgraded the National Income Accounting standards by
introducing some notable changes a year before.
• Change in Base year from 2005-06 to 2011-12
• Change from the Factor Prices to Market Prices.
• Change of Database of Corporate data.
• These changes have resulted in increased GDP growth
for 2015-16 and couple of years before that and it led to
criticism and became a notable issue globally.
Why the base year is revised periodically?
• Standard Practice to revise Periodically.
• GDP is typically measured by reference to the shape of
the economy in a “base” year.
• The weight they give to each sector depends on its
importance to the economy in the base year. As time
passes the figures become less and less accurate. Say,
the e-commerce sector didn’t have much importance in
the year 2005, but in 2012 the importance of e-commerce
was tremendous. Hence the base year revision becomes
important.
Effect of Base Year Revision
• Now, just because you change the base year doesn't
always mean your economy size would increase
dramatically.
• But when we change the base year, the value added gets
pushed up in some sectors and pulled down in others.
• There could be new sectors which get added, which
pushes its value up.
From the Factor Prices to Market Prices
• Until now, the manufacturing data was compiled factory-
wise. Now, activity at the enterprise-level is taken. This
means selling and marketing expenses are also
considered, instead of just production costs.
• Now GDP at factor cost will no longer be discussed;
instead, industry-wise estimates will be presented as
gross value added (GVA) at basic prices while GDP at
market prices will be referred to as GDP and it will be
equal to GVA at basic prices plus production taxes minus
subsidies.
Why did this become an issue?
• The Reserve Bank of India prefers GVA to give its
projection, but National Statistical Commission (NSC)
says one should focus on both GDP and GVA to access
economic parameters.
• CRISIL chief economist opines that GDP at market prices
is an indicator of the health of the economy.
• Some others argue that GVA seems to be a better
representation of economic activity on the ground.
Advantages of Market Prices
• The indirect taxes and product subsidies are now playing
an important role in the GDP calculations now, which
means the management of public finance has a major role
in the analysis of the economy.
• This will have a direct bearing on the macroeconomic
indicators since crucial public finance parameters are
compared on the basis of GDP.
• More production taxes make GDP higher. In short, the
government cannot inflate GDP by more subsidies and
lesser taxes.
Change of database for Corporate Data
• The new GDP incorporates more comprehensive data on
corporate activity than the old one. Earlier, data from the
Annual Survey of Industries (ASI), which comprises over
two lakh factories, was used to gauge activity in the
manufacturing sector.
• Now, annual accounts of companies filed with the
Ministry of Corporate Affairs — MCA21 — is being
used. This is said to include around five lakh companies,
bringing in more companies from the unlisted and informal
sectors.
Advantages of the change in database
• The first estimates put out in any year were based on IIP
(based on output volume) and these were revised after two
years, when the ASI data was available to capture value
addition, so to get a comprehensive data there was
considerable gap.
• The new method captures the value addition in the first year by
using the MCA21 database and much efficient and quicker
estimates are available. The CSO has highlighted that any
improvement in corporate performance, which was aided by
higher inflation and low input cost, is now reflected in the new
series.
Types of Estimates
• Before going to learn the latest data released by the
Economic survey we need to understand the
nomenclature which comes with these data. We usually
encounter with Advance Estimates, Provisional Estimates,
Revised Estimates, and Quarterly Estimates and so along
with the data
• Let us understand each of those.
Advance Estimates:
• Released on 7th Feb (in advance before the completion of
financial year)
• Based on Quick Estimates of the previous financial year
released on 31st January, the sector-wise estimates are
obtained by extrapolation using various indicators like
• Index of Industrial Production (IIP) of last 8 months of the year,
• expenditure of Central for the last 10 months and State Governments
for the last 3 quarters and
• growth rates of various indicators of service sector e.g. Gross Trading
Index(GTI), deposits & credits, passenger and freight earnings of
Railways, civil aviation, number of telephone connections etc.
Provisional Estimate:
• Released on 31st May (two months after completion of a
financial year)
• Based on information on above indicators, which now
become available for the whole of financial year. This
includes availability of various indices which have final
values as against quick or provisional estimates at the
time of advance estimates.
Quarterly Estimates
• GDP estimates for a quarter (QGDP) are released two
months after the end of a quarter. The QGDP estimates
are revised along with the revisions in the annual
estimates, which are normally released in the months of
January/February.
• QGDP estimates of Q1, Q2, Q3 and Q4 are brought out in
the public domain by Press Release. The Press release
includes quarterly data for the current year and
previous two years for purposes of comparison.
LATEST GDP NUMBERS in ECONOMIC SURVEY
• Economic Survey predicts that India’s GDP growth will
accelerate from 6.75% this year to 7-7.5% in 2019.
• GDP growth expected to be between 6.5 and 6.75 per
cent in 2017-18.
• Real GDP growth expected at 6.5 per cent in 2017-18
• GVA growth at basic prices is expected to be 6.1 per cent
in 2017-18
Performance of key sectors:
• The growth rate in Gross Value Added (GVA) by the
agriculture and allied sectors is estimated to be 4.9 per
cent for 2016-17, as per provisional estimates.
• Growth rate in the Gross Value Added (GVA) by the
industrial sector was 5.6 per cent in 2016-17 and 5.8 per
cent in the second quarter of 2017-18.
• The services sector is projected to grow at 8.3 per cent in
2017-18, as against 7.7 per cent in 2016-17.
Alternatives to GDP – Why?
• GDP is like a speedometer: it tells you whether your economy
is going faster or slower. As in cars, a speedometer is useful
but doesn’t tell you everything you want to know. For example,
it won’t tell you whether you are overheating, or about to run
out of fuel.
• Above all, the speedometer doesn’t tell you whether or not
you’re going in the right direction. If you suggest to a car driver
that you might be on the wrong road, and the response is “then
we must go faster”, you might think that’s pretty stupid. Yet this
is what happens whenever complaints about the state of the
economy elicit a commitment to boost growth.
GDP does NOT measure:
• Health indicators: infant mortality, morbidity, suicide rates;
• crime
• poverty and inequality in income gap (women/men;
poor/wealthy)
• Environmental health/decay and destruction of the natural
environment, lack of concern for future generations.
Therefore several other indicators beyond GDP have been
developed by leading economists to be able to cover the other
aspects of economy and get an overall picture of its growth and
development.
Genuine Progress Indicator (GPI) - 1994
• Attempts to shift prevailing definition of progress from
economic growth to people's sense of quality of their lives.
• The GPI assigns value to the life-sustaining functions of
households, communities and the natural environment so that
the destruction of these and their replacement with
commoditized substitutes, no longer appears as growth and
gain.
• GPI accounts for: Unpaid work, crime and family breakdown,
income distribution, resource depletion, defence expenditures,
public infrastructure and services, costs of road accidents,
under-employment etc.,
Gross National Happiness (GNH) Index
• Gross National Happiness is a term coined by His Majesty the
Fourth King of Bhutan, Jigme Singye Wangchuck in the 1970s.
• The concept implies that sustainable development should take
a holistic approach towards notions of progress and give equal
importance to non-economic aspects of wellbeing.
• The concept of GNH has often been explained by its four
pillars:
• Good governance,
• Sustainable socio-economic development,
• cultural preservation, and
• Environmental conservation.
 Rule of Law

Consensus-
Oriented Transparency

Elements of
Participatio Responsive
n Good ness
Governance

Efficiency & Equity &

Effectivene Inclusivene
ss ss
Accountabil
ity
GNH Contd..
• Lately the four pillars have been further classified into nine
domains in order to create widespread understanding of GNH
and to reflect the holistic range of GNH values.
• The nine domains are: psychological wellbeing, health,
education, time use, cultural diversity and resilience, good
governance, community vitality, ecological diversity and
resilience, and living standards.
• The domains represents each of the components of wellbeing
of the Bhutanese people, and the term ‘wellbeing’ here refers to
fulfilling conditions of a ‘good life’ as per the values and
principles laid down by the concept of Gross National
Happiness.
The GNH Index: What is it?
• The Gross National Happiness Index is a single number
index developed from 33 indicators categorized under
nine domains.
• The GNH Index is constructed based upon a robust
multidimensional methodology known as the Alkire-Foster
method.
• The GNH Index is decomposable by any demographic
characteristic and so is designed to create policy
incentives for the government, NGOs and businesses of
Bhutan to increase GNH.
Recent Developments of GNH in India
• In July 2016, Madhya Pradesh became the first state to
announce its happiness department.
• Madhya Pradesh will be the first state in the country to
float a happiness index in 2018. The index, based on a
questionnaire will help the government gauge the
happiness quotient of people.
• Andhra Pradesh has become the second state in the
country after Madhya Pradesh to start a Happiness Index
Department.
Human Development Index (HDI)
Inequality-adjusted Human Development Index
(IHDI)
• Like all averages, the HDI conceals disparities in human
development across the population within the same
country. Two countries with different distributions of
achievements can still have the same average HDI value.
• The IHDI takes into account not only the average
achievements of a country on health, education and
income, but also how those achievements are distributed
among its population by “discounting” each dimension’s
average value according to its level of inequality.
Gender Development Index (GDI)
• The GDI measures differences between male and female
achievements in three basic dimensions of human
development: health, measured by female and male life
expectancy at birth; education, measured by female and
male expected years of schooling for children and female
and male mean years of schooling for adults ages 25 and
older; and equitable command over economic resources,
measured by female and male estimated earned income.
Gender Inequality Index (GII)
• It shows the loss in potential human development due to
disparity between female and male achievements in two
dimensions, empowerment and economic status, and reflects a
country’s position relative to normative ideals for the key
dimension of women’s health. Overall, the GII reflects how
women are disadvantaged in these dimensions.
• There is no country with perfect gender equality – hence all
countries suffer some loss in achievements in key aspects of
human development when gender inequality is taken into
account.
Multidimensional Poverty Index
• The MPI reflects both the prevalence of multidimensional
deprivation, and its intensity—how many deprivations
people experience at the same time. It can be used to
create a comprehensive picture of people living in poverty,
and permits comparisons both across countries, regions
and the world and within countries by ethnic group, urban
or rural location, as well as other key household and
community characteristics.
• The MPI offers a valuable complement to income-based
poverty measures.
Green GDP
• Green GDP is a measure of the growth, calculated by adjusting
the environmental implications like costs of depletion and
degradation of natural resources of the growth in the
conventional GDP.
• China was the first to have experimented with green
accounting in 2004 but dropped it in 2007 because factoring in
environmental costs had a significant impact on the China’s
perceived “economic growth”.
• In 2006, the Chinese Green GDP showed that the financial loss
caused by pollution in China was 511.8 billion Yuan ($66.3
billion), which was 3.05% of the nation’s economy.
Green GDP in India
• The Ministry of Statistics and Programme Implementation set
up an expert group in 2011 led by Partha Dasgupta from
Cambridge University, to work out a framework for green
national accounts in India.
• The Dasgupta-led expert group had submitted its report in
March 2013, recommending that economic evaluation be made
on the basis of a comprehensive notion of wealth, including
aspects such as infrastructure and capital equipment, human
capital and natural capital.
• This process was supposed to be culminated in 2015 but is still
pending.
Gross Sustainable Development Product
• It measures the cost of growth and development
developed by the Global Community Assessment Centre
and the Society for World Sustainable Development
(WSD)
• It is defined as the total value of production within a region
over time and is measured using market prices for goods
and services transactions in the economy. It is designed
to replace the GDP.
GSDP Contd.
• The GSDP measures: economic impacts of environmental and
health degradation or improvement through accounting for
• resource depletion, depreciation or appreciation or finding new
resources (stocks)
• impact of people activity on environment, on availability of resources
and economic development
• welfare, quality of life and economic development of future generations
• expenditures on pollution, health, floods, car accidents
• the impact of economic growth on biological diversity
• impacts of social costs, health costs, on future generations and the
nation's income
Further Confusion with multiple indices
• Thus drawbacks of the GDP have led to development of
several indicators creating further confusion as to which
one is to be chosen for monitoring the progress. There
was a need for an agenda to move in a direction for
betterment of the world. Thus the Millennium
Development Goals were conceived.
Millennium Development Goals
• At the Millennium Summit in September 2000, UN
Millennium Declaration started a new global partnership to
reduce extreme poverty and setting out a series of time-
bound targets, with a deadline of 2015 that have become
known as the Millennium Development Goals.
• There were 8 Goals that were decided upon: focusing on
poverty, education, gender equality, child and maternal
mortality, combating dangerous diseases, environmental
sustainability and developing a Global Partnership for
Development
Assessment of MDGs
• The MDGs helped to lift more than one billion people out of
extreme poverty, to make inroads against hunger, to enable
more girls to attend school than ever before and to protect our
planet. Yet for all the remarkable gains, inequalities persist and
that progress has been uneven. Around 1.5 billion people in
conflict affected countries and on the extreme margins of
society were unreached by the goals and unable to benefit
from the tide that lifted their neighbours.
• Some goals were met and some fell short. So, the MDG’s
successor – the Sustainable Development Goals were adopted
by world leaders at a summit in New York.
Sustainable Development Goals
• On 1 January 2016 came into existence the 17
Sustainable Development Goals (SDGs) and 169 targets
of the 2030 Agenda for Sustainable Development
which were adopted by world leaders in September 2015
at an historic UN Summit.
• The SDGs, also known as Global Goals, build on the
success of the Millennium Development Goals (MDGs)
and aim to go further to end all forms of poverty.
SDGs Contd..
• The SDGs are not legally binding, but governments are
expected to take ownership and establish national
frameworks, follow-up and review, at the national, regional
and global levels, with regard to the progress made for
the achievement of the 17 Goals.
• The Addis Ababa Action Agenda that came out of the
Third International Conference on Financing for
Development provided concrete policies and actions to
support the implementation of the new agenda.
The 17 SDGs
• Do we need another set of global goals?
• The document is being seen as a political document, not a
technical one. Criticism that there are too many — 17 goals
with 169 targets makes it a complex task to monitor, ensure
reporting and hold governments accountable, but the Rio+20
consensus was for a comprehensive document, and this is
comprehensive.
• But while the jury remains out on whether these are
achievable and realistic, whether the lack of clarity on
monitoring and accountability makes it an exercise in spelling
out truisms and platitudes, the fact that this is a political
undertaking is important.
• As undertakings that civil society and citizens can hold
leaders accountable for, the goals are significant.
• Also, given that this is the first time that ALL nations adopt
the same set of goals, regardless of their relative position on
the development continuum, given that emerging
economies in the developing world will play significant roles
as donors in their own right even as the developing world
negotiates with the developed world to keep its commitments
on Official Development Assistance and other forms of
financial structural reform, the goals are more than just 17
desirables.