Indian Economy, 5th edition (5 page)

The
different uses
of the concept GDP are as given below:

(i)
Per annum percentage change in it is the ‘growth rate’ of an economy. For example, if a country has a GDP of Rs. 107 which is 7 rupees higher than the last year, it has a growth rate of 7 per cent. When we use the term ‘a growing’ economy, it means that the economy is adding up its income i.e. in quantitative terms.

(ii)
It is a ‘quantitative’ concept and its volume/size indicates the ‘internal’ strength of the economy. But it does not say anything about the ‘qualitative’ aspects of the produced goods and services by the economy.

(iii)
It is used by the IMF/WB in the comaparative analyses of its member nations.

NDP

Net Domestic Product (NDP) is the GDP calculated after adjusting the weight of the value of ‘depreciation’. This is, basically,
net form
of the GDP, i.e. GDP minus the total value of the ‘wear and tear’ (depreciation) that happened in the assets while the goods and services were being produced. Every asset (except human beings) go for depreciation in the process of their uses, which means they ‘wear and tear’. The governments of the economies decide and announce the rates by which assets depreciate (done in India by the Ministry of Commerce and Industry) and a list is published, which is used by the different sections of the economy to determine the real levels of depreciations in different assets. For example, a residential house in India has a rate of 1 per cent per annum depreciation, an electric fan has 10 per cent per annum, etc., calculated in terms of the asset’s price. This is
one way
how depreciation is used in economics. The
other way
it is used in the external sector while the domestic currency floats freely in front of the foreign currencies, If the value of the domestic currency falls following market mechanism in front of a foreign currency, it is the situation of ‘depreciation’ in the domestic currency, calculated in terms of loss in value of the domestic currency.

Thus,
NDP = GDP – Depreciation.

This way, NDP of an economy has to be always lower than its GDP for the same year, since there is no way to cut the depreciation to zero. But mankind has achieved too much in this area by the developments such as ‘ball-bearing’, ‘lubricants’, etc., all innovated to minimise the levels of depreciation.

The
different uses
of the concept of NDP are as given below:

(a)
For domestic use only – to understand the historical situation of the loss due to depreciation to the economy. Also used to understand and analyse the sectoral situation of depreciation in industry and trade in comparative periods.

(b)
To show the achievements of the economy in the area of research and development which have tried cutting the levels of depreciation in a historical time period.

However, NDP is not used in comparative economics, i.e., to compare the economies of the world. Why this is so? This is due to different rates of depreciation which is set by the different economies of the world. Rates of depreciation may be based on logic (as it is in the case of houses in India—the cement, bricks, sand and iron rods which are used to build houses in India can sustain it for the coming 100 years, thus the rate of depreciation is fixed at 1 per cent per annum). But it may not be based on logic all the time - for example, upto Feb 2000 the rate of depreciation for the heavy vehicles (vehicles with 6-wheels and above) was 20 per cent while it was done 40 per cent afterwards - to boost the sales of the vehicles. There was no logic in doubling the rate! Basically, depreciation and its rates are used by the modern governments as a tool of economic policy-making also, which is the
third way
how depreciation is used in economics.

GNP

Gross National Product (GNP) is the GDP of a country added with its ‘income from abroad’. Here, the trans-boundary economic activities of an economy is also taken into account. The items which are counted in the segment ‘Income from Abroad’ are:

(i)
Trade Balance:
the net outcome at the year end of the total exports and imports of a country may be positive or negative accordingly added with the GDP (in India’s case it has always been negative except the three consecutive years 2000-03 when it was positive, due to high levels of ‘services sector’ export during the years courtsey the booming BPO industry).

(ii)
Interest of External Loans:
the net outcome on the front of the interest payments i.e. balance of the inflow (on the money lend out by the economy) and the outflow (on the money borrowed by the economy) of the external interests. In India’s case it has been always negative as the economy has been a ‘net borrower’ from the world economies.

(iii)
Private Remittances:
the net outcome of the money which inflows and outflows on account of the ‘private transfers’ by the Indian nationals working outside India (to India) and the foreign nationals working in India (to their home countries). On this front India has been always a gainer- till early 1990s from the Gulf region (which fell down afterwards in the wake of the heavy country-bound movements of the Indians working there due to the Gulf War) and afterwards from the USA and the European nations. Basically, during the year
2012
, India is projected (as per the IMF) to be
the highest
receiver of this fund to the tune of $58 billion (it was the second highest in 2011 at $55 billion, China was the top gainer with $57 billion).

Ultimately, the balance of all the three components of the ‘Income from Abroad’ segment may turn out to be positive or negative. In India’s case it has been always negative (due to heavy outflows on account of trade deficits and interest payments of the foreign loans). It means, the ‘Income from Abroad’ is subtracted from India’s GDP to calculate its GNP.

The normal formula is
GNP = GDP + Income from Abroad.
But it becomes GNP = GDP + (– Income from Abroad) = GDP – Income from Abroad, in the case of India. This means that India’s GNP is always lower than its GDP.

The
different uses
of the concept GNP are as given below:

(a)
This is the ‘national income’ according to which the IMF ranks the nations of the world in terms of the volumes – at the Purchasing Power Parity (at PPP). For detailed discussion on the PPP readers may
search for it alphabetically
in the
Chapter- 24.
India is ranked as the
4th largest economy
of the world (after the USA, Japan and China)- while as per the nominal/ prevailing exchange rate of rupee India is the
13th largest economy
.

(b)
It is the more exhaustive concept of national income than the GDP as it indicates about the
‘quantitative’
as well as the
‘qualitative’
aspect of the economy, i.e., the
‘internal’
as well as the
‘external’
strength of the economy.

(c)
It enables us to learn several facts about the production behaviour and pattern of an economy, such as, how much the outside world is dependent on its product and how much it depends on the world for the same (numerically shown by the size and net flow of its ‘trade balance’); what is the standard of its human resource in international parlance (shown by the size and the net flow of its ‘private remittances’); what position it holds regarding financial support from and to the world economies (shown by the net flow of ‘interests’ on external lending/borrowing).

NNP

Net National Product (NNP) of an economy is the GNP after deducting the loss due to ‘depreciation’. The formula to derive it may be written like:

NNP = GNP – Depreciation

or,

NNP = GDP + Income from Abroad – Depreciation.

The
different uses
of the concept NNP are as given below:

(a)
This is the
‘National Income’ (NI)
of an economy. Though, the GDP, NDP and GNP, all are ‘national income’ they are not written with capitalised ‘N’ and ‘I’.

(b)
This is the
purest form
of the income of a nation.

(c)
When we divide NNP by the total population of nation we get the
‘per capita income’
(PCI) of that nation i.e. ‘income per head per year’. A very basic point should be noted here that this is the point where the rates of dipreciation followed by the different nations make a difference. Higher the rates of depreciation lower the PCI of the nation (whatever be the reason for it- logical or artificial as in the case of depreciation being used as a tool of policy-making)! Though, economies are free to fix any rate of depreciation for the different assets the rates fixed by them make difference when the NI of the nations are compared by the international financial institutions like the IMF, WB, ADB, etc.

Cost and Price of National Income

While calculating national income the issues related to ‘cost’ and ‘price’ also needs to be decided. Basically, there are two sets of costs and prices –and an economy needs to choose at which of the two costs and two prices it will calculate its national income. Let us understand the confusion and the relevance of this confusion.
9

(i)
Cost:
Income of an economy i.e. value of its total produced goods and services may be calculated at either the ‘factor cost’ or the ‘market cost’. What is the difference between them? Basically,
‘
factor cost’
is the ‘input cost’ the producer has to incur in the process of producing something (such as cost of capital i.e. interest on loans, raw materials, labour, rent, power, etc.). This is also termed as
‘factory price’
or ‘production cost/price’. This is nothing but ‘price’ of the commodity from the producer’s side. While the
‘market cost’
is derived after adding the indirect taxes to the factor cost of the product, it means the cost at which the goods reach the market i.e. showrooms (these are the Cenvat/central excise and the CST which are paid by the producers to the Central government in India). This is also known as the
‘ex-factory price’.
The weight of the state taxes are then added to it, to finally derive the ‘market cost’. In general, they are called
‘factor price’
and
‘market price’
also.

In India, income is calculated at factor cost,
and
so is the case with most of the developing countries (but among the developed economies it is calculated at the market cost). The reasons are – lack of uniformity in taxes, goods are not printed with their prices, etc. In present time, we see a great degree of tax-related uniformity coming to India to the extent the central taxes are concerned but the state taxes are still neither single nor uniform. Once the GST is implemented this abberation will end. Though for statistical purposes, income at market cost is also released by the Central Statistical Organisation (CSO).

(ii)
Price:
Income can be derived at two prices– constant and current. The difference in the prices at constant and current prices is only that of the
impact of inflation
. Inflation is considered stand still at a year of past (this year of the past is also known as the
‘base year’
) in the case of the constant price while in the current price the present day inflation is added. Current price is, basically, the maximum retail price (MRP) which we see printed on the goods selling in the market.

As per the new guidelines the
base year
in India has been revised from the 1993-94 to 2004-05 (the data based on the new constant year is presently known as the ‘new series’ of data) – announced in September, 2010.
India calculates its national income at constant prices
- so is the situation among the developing economies while the developed nations calculate it at the current prices. Though, for the statistical purposes the CSO releases the national income data at the current prices, too. Why? Basically, inflation has been a challenging aspect of policy making in India because of its level (i.e. range in which it dwindles) and stability (how stable it has been). In such situations the growth in the income levels of the population living below the poverty level (BPL) can never be measured accurately (because due to higher inflation the section will show higher income) and the Government will never be able to measure the
real
impact of the poverty alleviation programmes it runs for the population.

Here, one important aspect of the income needs to be understood. Income of a person has three forms – the first form is
nominal income
(the wage someone gets in hand per day or per month), the second form is
real income
(this is nominal income minus the present day rate of inflation- adjusted in percentage form), and the last one is the
disposable income
(the net part of wage one is free to use which is derived after deducting the direct taxes from the real/nominal income, depending upon the need of data). What happens in practice is that while the nominal income might have increased by only 5 per cent, it looks 15 per cent if the inflation is at the 10 per cent level! Unlike India, among the developed nations, inflation has been around 2 per cent for many decades (it means it has been at lower levels and stable, too. This is why the difference between the incomes at constant and current prices among them are narrow and they calculate their national income at current prices. They get more reliable and realistic data of their income).

The latest data of India’s National Income, as per the new
Economic Survey 2012-13
, is as given below:

i.
National Income
(i.e. NNP)
:
Approximately, Rs. 45.72 lakh crores at Constant Prices and Rs. 73.99 lakh crores at Current Prices (1st Revised Estimates for the 2011-12).