ECONOMIC POLICIES IN INDIA

(Trends & structure of national income)

By- Megha Garg

Unit-1 (Part-1)
B.Tech (7th sem)
Meaning
⚫ National Income, as the name suggests is the income of a
nation, measured in terms of production, during the course
of a financial year. Hence, when the production is
represented in terms of final goods and services, it is called
a National Product, whereas when it is represented in
monetary terms, it is National Income. It tends to determine
the quantum of economic activity carried out during the
course of an accounting period.
⚫ It refers to the sum total of all factor incomes that are
generated within the national territory of a country by
normal residents during one year.
⚫ It refers to the money value of all the goods and services
produced in a country during a fiscal year.
⚫ According to the National Income Committee, “A national
income estimate measures the volume of commodities and
services turned out during a given period, counted without
duplication.”
⚫ The rate of growth of national income when compared
with the rate of growth of population indicates whether the
economy is declining, stagnant or developing.
⚫ It is only when the national income grows at a rate faster
than the rate of growth of population that the per capita
income depicts a rising trend; the community is able to
improve its living standards and add to its stock of capital
and the economy moves on the path of a rising level of
activity and productivity.
⚫ It includes both the public and private sectors and
encompasses everything from haircuts to housing, from
medical care to national defense.
⚫ A variety of measures of national income and output are used
in economics to estimate total economic activity in a country or
region, including Gross Domestic Product (GDP), Gross
National Product (GNP), and Net National Income (NNI).
⚫ some measures count only goods and services that are
exchanged for money, excluding bartered goods, while other
measures may attempt to include bartered goods by imputing
monetary values to them.
Limitations:
⚫ Ignores non-monetary contributions to the economy, such as
unpaid work.
⚫ Differences in accounting practices and standards between
countries may affect comparability.
⚫ Difficulty in measuring the informal economy and
underground activities.
⚫ Inability to capture the effects of inflation, changes in
technology, and changing market conditions.
Importance of National Income:
⚫ Setting Economic Policy
National Income indicates the status of the economy and can give a clear picture of
the country’s economic growth. National Income statistics can help economists in
formulating economic policies for economic development.
⚫ Budget Preparation
The budget of the country is highly dependent on the net national income and its
concepts. The Government formulates the yearly budget with the help of national
income statistics in order to avoid any cynical policies.
⚫ Standard of Living
National income data assists the government in comparing the standard of living
amongst countries and people living in the same country at different times.
⚫ Defense and Development
National income estimates help us to bifurcate the national product between defense
and development purposes of the country. From such figures, we can easily know,
how much can be set aside for the defense budget.
⚫ Resource Allocation
National income data helps in allocating resources efficiently, identifying areas that
require more investment, and boosting economic growth.
⚫ International Comparisons
National income provides a basis for comparing the economic performance of
different countries and determining their relative strengths and weaknesses.
Trends & structure of national income
⚫ According to the National Income Committee, “A national
income estimate measures the volume of commodities and
services turned out during a given period, counted without
duplication.” Thus, a total of national income measures
the flow of goods and services in an economy.
⚫ For understand the trends and structure of national income
in Indian economy we have studies the pre-independence
period estimates and post-independence period estimates.
1. Pre-Independence Period Estimates
2. Post-Independence Period Estimates
Pre-Independence Period Estimates
⚫ Several estimates of national income were prepared in the British
period. Notable among the estimators were : Dadabhai Naoroji
(1868), William Digby (1899), Findlay Shirras (1911, 1922 and
1931), Shah and Khambatta (1921), V.K.R.V. Rao (1925-29 and
1931-32) and R.C. Desai (1931-40).
⚫ In the pre-independence estimates, Dadabhai Naoroji, Shah and
Khambatta, Findlay Shirras, Wadia and Joshi estimated the value of
the output of the agricultural sector and then added a certain
percentage as the income of the non-agricultural sector.
⚫ Dr. V.K.R.V. Rao made use of a combination of census of output
and census of income methods. He divided the economy of India
into two categories. In the first category were included agriculture,
pastures, mines, forests, fishing and hunting. Output method was to
be used to evaluate the product derived from these sectors. In the
second category were included industry, trade, transport, public
services and administration, professions, liberal arts and domestic
service. For these occupations, census of income method was used.
⚫ These estimates were based on statistics from the agricultural sector
which were highly undependable.
Post-Independence Period Estimates
⚫ Soon after Independence, the Government of India appointed
the National Income Committee in August, 1949.
⚫ The final report of the National Income Committee appeared in
1954. The report was a landmark in the history of this country
because for the first time, it provided comprehensive data of
national income for the whole of India. The principal features
of the National Income Committee report were as under:
1. During 1950-51, agriculture which also included animal
husbandry, forestry and fisheries contributed nearly half of the
national income.
2. Mining, manufacturing and hand trades contributed about
one-sixth of the total income.
3. Commerce, transport and communications accounted for a little
more than one-sixth of the total national income.
4. Other services such as professions and liberal arts,
administrative services, domestic services, house property
accounted for about 15 per cent of national income
5.The share of commodity production was about two-third of
the national income. The term commodity production
includes material production derived from agriculture,
mining, factory establishments, hand trades, etc.
6. Services accounted for about one-third of total national
income. Services sector includes commerce, transport and
communications, administrative services, liberal arts,
domestic services etc.
7. The share of the government sector in net domestic
product was 7.6 per cent in 1950-51. Along with it, the share
of the government in national expenditure was 8.2 per cent.
8. The margin of error in the calculation of national income
estimates worked out at about 10 per cent.
National Income Committee and C.S.O.
Estimates
For the post-independence period, we have five series in national income
estimates.
1. Conventional Series: provided national income data at current prices
and at 1948-49 prices for the period 1948-49 to 1964-65. The
conventional series divided the economy into 13 sectors. Income from six
sectors i.e., agriculture, animal husbandry, forestry, fishery, mining and
factory establishments is calculated by the output method and income
from the remaining seven sectors, i.e., small enterprises, organised
banking and insurance, commerce and transport, professions, liberal arts
and domestic service, public authorities, house property and rest of the
world is computed by census of income method.
Net Output Method : In agriculture, the output of each crop is estimated
by multiplying the area sown by the yield per hectare. For obtaining the
average yield crop cutting experiments were conducted. From the gross
value of output so obtained, deductions for the cost of seed, manures and
fertilisers, market charges, repairs and depreciation are made so as to
derive net value of the product from agriculture.
For animal husbandry, forestry, fishery, mining and factory
establishments, estimates of production are multiplied with market
price so as to obtain the gross value of the output. From the gross
value of output deductions are made for cost of materials used in
the process of production and depreciation charges etc. to obtain
net value added of each sector.
Net Income Method : In order to obtain the contribution of small
enterprises an estimate for the total number of workers employed
in different occupations classified under small enterprises is
prepared. On the basis of sample surveys, the average earnings
per head are obtained. By multiplying the total number of persons
employed with the average earnings per head, the contribution of
small enterprises is estimated.
⚫ For Banking and Insurance the balance sheets of the firms
provide the requisite information. Wages, salaries, directors’ fees
and dividends (distributed and undistributed) are all added to get
the net contribution of the sector.
⚫ For commerce and transport and for professions, liberal arts and
domestic services, the procedure is the same as for small
enterprises.
⚫ For public sector, wages, salaries, pensions, other benefits,
2. National Income Series at 1960-61 prices : This series provided
national income data at current prices and at 1960-61 prices for the period
1960-61 to 1975-76. Another series was started with 1970-71 as base year
instead of 1960-61. Estimates based on different base years indicate
differences in magnitudes, even when they are deflated at constant prices
either at 1948-49 or 1960-61 or 1970-71 prices. This is due to the
differences in weights used for the series. The Central Statistical
Organisation (CSO) brought out another Series on national income with
1980-81 as base year in place of the series with 1970-71 as the base year.
The Central Statistical Organisation (CSO) has revised the existing
series of national accounts with 1993-94 as the base year with a new series
with 1999-00 as the base year. Besides shifting the base year, the New
Series incorporates improvements in terms of coverage and to the extent
possible, the recommendations of the United Nations System of
National Accounts, 1993 (1993 UNSNA) have been incorporated. The
improvements in terms of coverage are the following :
(a) Inclusion of production of salt through sea water evaporation and the
production of betel leaf, toddy, goat, buffalo and camel milk, duck eggs
and meat production from unregistered slaughtering.
(b) Expenditure made on few tree crops during the gestation period and
setting up of wind energy systems are included in the estimates of output
of construction sector.
(c) A new category of ‘valuables’ has been included in the gross capital formation, in line with the
recommendations of 1993 UNSNA.
(d) Economic activities of other communication, renting of machinery and other equipment without
operator, computer related activities in unorganized segment, coaching centres, social work with
accommodation, recreational and cultural activities have been included.
Trends in National Income Growth and Structure
⚫ Figures of national and per capita income are collected at current prices. But figures of national
income at current prices do not give a correct picture about the growth of the economy, for the
increase in national income at current prices reflects the combined influence of two factors viz.,
(a) the increase in the production of real goods and services and (b) the rise in prices. •
⚫ The share of the organized sector has risen from 30 per cent in 1980-81 to 42.9 per cent in
2007-08. Consequently, the share of the unorganized sector declined from 70 per cent to 57.1
per cent during the same period.The process of economic development involves a rapid
expansion of public administration especially a rapid expansion of economic and welfare
services such as education, health and family welfare. Taking community and personal
services a group, there was an improvement in its share from 10.6 percent in 1950-51 to 13.4
percent in 2010-11.
⚫ The theory of economic growth also supports the structural change in the composition of
national product. The distribution of gross domestic product in developed countries indicates a
much higher share of industry and services and a relatively lower share for agriculture. The
disparity in per capita incomes between developed and underdeveloped countries is largely a
reflection of the disparity in the structure of their economies.
⚫ The share of finance, insurance, real estate and business services marginally declined from
7.7 percent in 1950-51 to 7.5 percent in 1980-81 and thereafter improved to 17.4 percent in
2010-11.
⚫ , India also experienced an improvement in the share of the tertiary sector. This was largely
due to an expansion in transport and communication, banking and insurance and public
administration. The rate of growth in all the components of the tertiary sector was 4.9 per cent
per annum during 1950-51 and 1990-91 which was higher than the overall rate of growth of
gross domestic product (i.e., 4.1 per cent) in the economy. During 2004-05 and 2010-11, the
 Limitations of National Income Estimation
in India
(a) The output of the non-monetised sector : While calculating national output, the
assumption normally made is that the bulk of the commodities and services
produced are exchanged for money. India, where agriculture is carried on a
subsistence basis, a considerable portion of the output does not come to the market
for sale but is either consumed by the producers themselves or is bartered away with
other producers in exchange for other goods and services.
(b) Non-availability of data about the income of small producers or household
enterprises : Another limitation in India is that a very large number of producers
carry on production at a family level, or run household enterprises on a very small
scale. Most of these small producers or entrepreneurs are so illiterate that they have
either no idea of maintaining accounts or they do not feel the necessity of keeping
regular accounts.
(c) Absence of data on income distribution : The National Accounts Statistics do not
generate any data on income distribution of households or persons. For this purpose,
instead of the National Sample Survey Organization (NSSO) have used data on
consumer expenditure and collected through a pilot survey on distribution of
income, consumption and savings during 1983-84 in 5 selected states and 4
metropolitan cities.
(d) Unreported illegal income : Studies about black economy pertaining to India have
shown that a significant part of the economy operates as hidden or subterranean
economy and the income generated in it goes as unreported income. According to a
study by Dr. Arun Kumar, black economy accounted for about 40 percent of total
income generated (Gross National Product),in 2000-01.