CHAPTER 10

India’s National Income

The aim of this chapter is to provide an understanding about the concept of national income with emphasis on analysis of various aspects of India’s national income, savings, and investment.

The concept: In the words of Kuznets (1948), national income is the net output of commodities and services flowing during the year from the country’s productive system into the hands of the ultimate consumers or into net addition to the country’s capital goods. This relationship is expressed in the national income identity, where the amount received as national income is identical to the amount spent as national expenditure, which is also identical to what is produced as national output. The terms income, output, and expenditure are interchangeable. National output, income, and expenditure are generated when there is an exchange involving a monetary transaction.

Characteristics of national income: National income has several important characteristics, and they are as follows:

1. it is a flow concept, which is measured at an annual rate;
2. it is measured in money terms;
3. it includes only goods and services bought for final use, not unfinished goods in the intermediate stages of production that are purchased for further processing and resale;
4. it may be viewed from three sides—the product side, the income side, or the expenditure side;
5. it includes only the value of economic activities, and in general, only products and services intended for sale are counted;
6. only those products produced in the current year are to be counted in this year’s incomes; products created during some previous time are not included.

The importance of national income: Government economic policies are generally aimed at controlling the level and composition of the national income, or the gross domestic product (GDP). The basis on which changes in government policy are made is various series of economic statistics, covering areas such as price, income, foreign trade, unemployment, and output. Since government policies are often aimed at controlling the level and composition of the national income or the GDP, these are the most important statistics. National income statistics attempt to show the value of the flow of goods and services that become available for consumption or new investment during each year, while the statistics for GDP attempt to measure the total output of the economy in each year. In both cases, the composition of the flows is shown, as well as their levels. Changes in the level of national income and GDP may occur because of price or output changes. The importance of recording changes in the level of national income and GDP stems from the fact that such changes may lead to problems or unemployment and inflation in the short term and poor growth in the long term. A shift in spending patterns from investment to personal consumption, for example, may lead to unemployment in the capital goods industry in the short term and reduced growth in the long term. The study of national income is important in order to:

1. understand the economic development of the country;
2. assess the developmental objectives;
3. assess the contribution of the various sectors to national income.

The rate of growth of the net 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 net national income grows faster than the 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. Central to an understanding of the national output and its method of compilation is the basic interrelationship that exists between output, income, and expenditure. All these can be regarded simply as different stages in the process of creating and disposing of income and, therefore, as different ways of looking at the same thing. Economic growth figures matter because they sum up the improvement in well-being, which different sections of the populace measure and experience differently. Companies seek higher profit growth and, investors, higher stock prices. The employed seek a faster rise in wages and salaries, and job seekers an expansion of employment opportunities.

Problems with GDP measurement: The concept of GDP or GVA (gross value added) is one thing; measurement is another, compounded by a substantial presence of the unorganized sector and lack of proper samples. A base year is periodically revised to reflect the changes in the economy and capture growth better. But when a base year is changed, the GDP data for earlier years is also recast to enable better comparison and forecasts. Change of base year to calculate GDP is done in line with the global exercise to capture economic information accurately. Ideally, the base year should be changed every five years to capture the changing economy. There are many difficulties in measuring a nation’s income. Some of the more important difficulties encountered are as follows:

1. complications arise through arbitrary definitions
2. “do it yourself” production such as housekeeping and child-rearing, the seriousness of whose omission from the national accounts can be grave
3. the value of the services rendered by consumer durable goods
4. government activity or services
5. the informal economy
6. inadequate information
7. the danger of double-counting
8. international trade
9. money measurement and its use

National Income and Economic Well-Being

Simon Kuznets, who founded the System of National Accounts that is encapsulated in the GDP number, had himself warned against reading too much into it. “The welfare of a nation,” he wrote in 1934, “can scarcely be inferred from a measurement of national income as defined (by the GDP)” (Green 2014). Economists have always known that national income is not a good measure of welfare in the wider sense of the term. Further, during the last few years, there has been increasing criticism of the conventional measurement of national income on the grounds that it is a poor measure of welfare/well-being in some sense or other. Nicolas
Sarkozy, the former French president, appointed a commission to examine how the wealth and social progress of a nation could be measured, without relying on the unidimensional gross domestic product (GDP) measure. The commission, comprising 25 prominent social scientists, five of whom were Nobel laureates in economics, presented its findings. Professor Joseph E Stiglitz served as chairman of the Commission on the Measurement of Economic Performance and Social Progress (CMEPSP), generally referred to as the Stiglitz–Sen–Fitoussi Commission, after the surnames of its leaders. The commission was formed in February 2008, and the Final Report was published in September 2009.1 The commission concluded that GDP does not answer basic issues concerning people’s welfare and is a poor measure of well-being. The commission has tried to provide guidance for creating a broader set of indicators that will capture both well-being and sustainability more accurately. Such a new indicator would look at issues like environmental protection, work–life balance, and the economic output required to rate a country’s ability to maintain sustainable happiness for its people. The commission divided its work into three parts:

The first deals with familiar criticisms of GDP as a measure of well-being.

The second deals with the measures of the “quality of life.” These measures attempt to capture well-being beyond a mere command of economic resources.

The third deals with the well-being of future generations.

Welfare obviously includes innumerable factors—peace, tolerance, love of one’s neighbor, family life, satisfaction with one’s job or surroundings, justice, and many other items that cannot be brought into relation with the measuring rod of money. GDP is far from being a perfect measure of economic welfare. But it does provide a total measure, up to a point, in a meaningful way, of very many of the items that do contribute to welfare and without which most people would consider themselves worse off. The concept of welfare is basically a subjective concept. One can choose to use it wisely or badly. Because of the uses to which the GDP concept may be put, there is no question of abandoning it in favor of some other concept that might be a better measure of welfare. The only serious issue is whether the conventional GDP concept can be supplemented by other measures that might come closer to a measure of economic welfare.

Broadening official statistics is a good idea in its own right, and some countries, notably, tiny Bhutan, have already started. However, there are pitfalls. It was the king of Bhutan, Jigme Singye Wangchuck, who, in 1972, noted that GDP alone did not measure what people want and that “gross national happiness is more important than gross national product.” The UN General Assembly placed the concept on the global development agenda in 2011 and declared March 20 as International Day of Happiness. The report justifies wider measures of well-being. But the risk is that a proliferation of measures could be a gift to interest groups, letting them pick numbers that amplify their misery in order to demand a bigger share of the national pie.

Professor Joseph E Stiglitz called for alternative ways of measuring welfare. Welfare, or normative, economics is the study of how economic activities ought to be organized. Welfare criteria are rules for judging whether one state of economy is better or worse than another. It is imperative that India adopt the new criteria provided by the Stiglitz Commission in measuring the success of its welfare programs and “abandon GDP fetishism.” However, one needs to recognize that the uses of GDP are so many and so far-fetched that one cannot just throw away its universal acceptability for problems in its expression. Other attempts, such as Human Development Index, are also somewhat useful, but they also have the problems of collecting data and reporting the correct figures. There is also a recalculation of GDP according to the purchasing power of money to solve the problem of one dollar buying more in a developing country, such as in India. These attempts, however, have not become very popular and universally acceptable. In sum, the commission has recommended the following:

1. When evaluating material well-being, look at income and consumption rather than production.
2. Emphasize the household perspective.
3. Consider income and consumption jointly with wealth.
4. Give more prominence to the distribution of income, consumption, and wealth.
5. Broaden income measures to nonmarket activities.
6. Quality of life depends on people’s objective conditions and capabilities. Steps should be taken to improve measures of people’s health, education, personal activities, and environmental conditions. In particular, substantial effort should be devoted to developing and implementing robust, reliable measures of social connections, political voice, and insecurity that can be shown to predict life satisfaction.
7. Quality-of-life indicators in all the dimensions covered should assess inequalities in a comprehensive way.
8. Surveys should be designed to assess the links between various quality-of-life domains for each person, and this information should be used when designing policies in various fields.
9. Statistical offices should provide the information needed to aggregate across quality-of-life dimensions, allowing the construction of different indexes.
10. Measures of both objective and subjective well-being provide key information about people’s quality of life. Statistical offices should incorporate questions to capture people’s life evaluations, hedonic experiences, and priorities in their own survey.
11. Sustainability assessment requires a well-identified dashboard of indicators. The distinctive feature of the components of this dashboard should be that they are interpretable as variations of some underlying “stocks.” A monetary index of sustainability has its place in such a dashboard, but, given the current state of the art, it should remain essentially focused on economic aspects of sustainability.
12. The environmental aspects of sustainability deserve a separate follow-up based on a well-chosen set of physical indicators. In particular, there is a need for a clear indicator of proximity to dangerous levels of environmental damage (such as that associated with climate change or the depletion of fishing stocks).

Well-being is multidimensional and should be considered simultaneously: material living standards (income, consumption, and wealth); health; education; personal activities, including work; political voice and governance; social connections and relationships; environment (present and future conditions); insecurity, of an economic as well as a physical nature. All these dimensions shape people’s well-being, yet many of them are missed by conventional income measures. Objective and subjective dimensions of well-being are both important. Use a pragmatic approach toward measuring sustainability. There are physical indicators for environmental pressures.2

The Inclusive Development Index (IDI) has been developed by the World Economic Forum (WEF) study, as a new metric of national economic performance as an alternative to GDP. It reflects more closely the criteria by which people evaluate their countries’ economic progress. Instead of the normal GDP growth, this index takes into account the “living standards, environmental sustainability, and protection of future generations from further indebtedness.” For the WEF, reliance on GDP as a measure of economic achievement is fueling short-termism and inequality. The decades of prioritizing economic growth over social equity have led to historically high levels of wealth and income inequality and caused governments to miss out on a virtuous circle in which growth is strengthened by being shared more widely and generated without unduly straining the environment or burdening future generations. Excessive reliance by economists and policy makers on GDP as the primary metric of national economic performance is part of the problem. The GDP measures current production of goods and services rather than the extent to which it contributes to broad socioeconomic progress as manifested in median household income, employment opportunity, economic security, and quality of life. Rich and poor countries alike are struggling to protect future generations, as WEF cautioned political and business leaders against expecting higher growth to be a panacea for the social frustrations, including those of younger generations that have shaken the politics of many countries in recent years (Devasahayam 2019). GDP has been called one of the greatest ideas of the 20th century. For the 21st, we need a GDP 2.0.3

India’s National Income

National income estimates are published annually by the Central Statistical Office (CSO) of the Government of India in its publication, National Accounts Statistics. The principal aspects of estimation relate to the selection of methods applicable to the various sectors, collection of information, and sectoring of the economy. In the combination of a mixed method, both the output method and the income method have been used. The output method has been used largely in the commodity producing sectors like agriculture and manufacturing. The income method has been used in the tertiary or service sector like government and banking, and so on. The income method has also been applied to commodity sectors, where it is very difficult to obtain net output data. In using the output method in India, the “value-added” approach has been adopted. The “value added” is equal to the value of goods minus the cost of production. In other words, this concept measures the net contribution to national income of a producing unit. The sum total of values added by all the producing units in the commodity sector gives the value of this sector’s contribution to national income.

The estimation is done by evaluating goods at ex-factory prices and deducting from it the values of such elements of costs as cost of inputs and intermediate goods and services supplied by other enterprises as also the estimated value of capital consumption, that is, depreciation. In the income method, the procedure is to find out the number of people working in a profession and their earnings per head. The two are then multiplied to get the total value of income contributed by the profession. In respect of construction, however, the commodity-flow approach has been adopted, envisaging estimation of the value of domestic production of the commodities used in construction and adjusting the same for changes in stocks, import, and exports.

Kind of data required: If the value-added approach is adopted, the data required for the output method should be about production, prices, and cost of production. For the income method, statistics about the number of persons employed in different professions and their earning are needed. In India, the information under these methods has been collected from various sources. These sources include government agencies like ministries, departments, and directorates. These agencies publish data on agriculture, industries, trade, income tax, revenues, and so on, in various bulletins and publications more or less on a continuous basis.

There are also National Sample Surveys that supply data on specific subjects. Moreover, reports such as those of the Rural Credit Survey and the Indian Rural Debt and Investment Survey have been made use of. Further, various population censuses have also been used to estimate the workforce in the absence of comprehensive employment statistics in various professions. Since adequate and up-to-date data on output and costs is not available in the case of certain goods and services, arbitrary imputations are made. In some cases, even data emanating from field surveys and local inquiries are used for estimating certain costs.

GDP based on 2004–2005 prices did not reflect the current economic situation correctly. The new series, with a base of 2011–2012 prices, is in compliance with the United Nations guidelines in the System of National Accounts—2008 (NSA). It takes information for the corporate sector and has better estimates of the unorganized sector from the 2010–2011 National Sample Survey on unincorporated enterprises and data on sales and service taxes.

Sectors: The CSO’s methodology for making estimates of national income in India runs along the following lines: The entire economic activity is classified into three major sectors comprising 13 subsectors. In seven subsectors, the income method is used, and in five the output/production method is applied, and only in the construction sector is the mixed method, expenditure and commodity flow, used. CSO prepares the estimate of net domestic product. To this is added the net income from abroad to get the estimate of national product or national income. The sectors, along with their subsectors, are presented in Table 10.1.

Table 10.1 Measurement of national income in India

With the advancement of the economy, the quality of the estimates has further improved. India officially used to calculate its national income at factor cost, but since January 2015, the CSO has switched over to market price or market cost.4

Revisions in GDP estimates form part of the exercise of constructing the national accounts. The issue of data availability on a variety of indicators is the most serious constraint in the Indian case. It is known that direct estimates are available for few sectors, while for the rest, the statistical agency has to rely on quinquennial surveys. Issues with revisions can have important implications for data quality, credibility, and the ultimate usability of the data (Sapre and Sengupta 2017).

Trends in national income: India’s national income has grown steadily from 1950–1951 to 2018–2019. However, this growth has been neither uniform nor steady during this period. In this context, a notable point about the growth trend in national income is that whereas during the first three decades of development, 1951–1981, the growth rate was low and revolved around 3.5 percent, in 1981 the economy entered a relatively higher growth phase. The term “Hindu rate of growth” was used to refer to the phenomenon of sluggishness in the growth rate of the Indian economy (3.5 percent observed persistently during the 1950s–1980s). The term was coined by Professor Rajkrishna (Member, Planning Commission) in 1978 to characterize the slow economic growth and to explain it against the backdrop of socialistic economic policies. This captured the popular imagination and was used synonymously to describe the inadequacy of India’s growth performance. Many economists pointed out that the so-called Hindu rate of growth was a result of socialist policies and had nothing to do with Hinduism. The adoption of economic reforms and liberalization since the 1990s manifested in the tripling of the growth rate of the Indian economy in comparison with this low level. The marked fluctuations in year-to-year growth rates in the early stages indicated that the economy had failed to create conditions conducive to stable economic growth. The country depended on natural factors, such as the monsoon. Recent growth has been more robust and less vulnerable to agricultural performance and the vagaries of the monsoon. The country’s gross national income (GNI) at current prices recorded a rise of about 10 percent, at ₹165.87 lakh crore ($2.25 trillion), during 2017–2018; in real terms (with 2011–2012 base year), the GNI increased at a slower rate, 6.7 percent, to ₹128.64 lakh crore ($1.75 trillion) in the fiscal year ended March 2018. For the fiscal year ended March 2017, the real-term GNI grew by 7.1 percent.5 The analysis reveals that the real growth rate has accelerated over the years from 2012 to 2013. A seasonality factor has been noticed, with growth invariably at a peak in the second quarter and a trough in the fourth quarter. Growth performance during the first half of every year has been better than during the second half (Rajakumar and Shetty 2016).

India’s postliberalizing reform growth rates have been higher but more volatile. Although it left behind the steady Hindu rate of growth for a higher growth of about 7 percent in the 12 years since 2005–2006, the lowest rate of growth in this period was 3.1 and the highest 8.5. The World Bank, in its April 2019 report on South Asia, said India’s GDP growth is expected to accelerate moderately to 7.5 percent in FY19–20, driven by continued strengthening of investment—particularly, improved private export performance and resilient consumption.

Trends in per capita income: The per capita income is a crude indicator of the prosperity of a country. India’s per capita income has not grown at the pace at which national income has risen over the past seven decades (1947–2017), registering an increase of just over five fold during this long period. The reason for the slow growth of per capita income is that India’s population has grown rapidly during this period. Increasingly large numbers of people being added to the existing population every year takes away a major share of increase in national income and thus permits only a small rise in per capita income. However, the fact that the per capita income in the economy has been increasing proves that the rate of growth of national income has exceeded the rate of growth of population. In real terms, calculated at constant prices with 2011–2012 as the base, the per capita income grew by 5.4 percent to ₹86,668 ($1168) in 2017–2018 (Table 10.2).

Table 10.2 Gross national income and net national income

It is worthwhile to note the significance of national income at current and constant prices. Income at current prices is the money value of final goods and services, measured at the prices of the current year. For example, measurement of India’s National Income of 2019-2020 at the prices of 2019-2020. It measures GDP/ inflation/asset prices using the actual prices prevailing in the economy, while constant prices adjust for the effects of inflation. Using constant prices enables to measure the actual change in output (and not just an increase due to the effects of price rise/inflation. At present, the base year for GDP is 2011–12 prices.

Composition of national income: The structure or composition of the national income of an economy explains the relative significance of its different producing sectors. When a country is at a stage of underdevelopment, the primary sector (agriculture and allied occupations) makes the largest contribution to the national income. As the country grows and develops, the contribution of the industrial and services sectors gradually increases, and on the basis of the composition of GDP, one can easily determine the level of development of the country. In India, over the period 1951 to 2019, the share of the primary sector in the national income has fallen, while that of the secondary and tertiary sectors has increased. This trend is accelerated further in the wake of liberalization of the economy owing to the involvement of the private sector, technological advances, and lower fixed capital requirements. The rate of growth of the secondary and tertiary sectors has been more than double that of the primary sector. However, since the 1980s, the tertiary sector has been growing the fastest and has become the growth driver of the Indian economy.

This pattern of structural change in the Indian economy has deviated from the development pattern of the Western economies, which first experienced a shift from the primary to the secondary sector and only later, at an advanced stage, a significant shift in favor of the tertiary sector. That pattern of development enabled them to transfer the growing labor force from the primary to the secondary sector. In India, this has not been possible because the secondary sector has not expanded fast enough to absorb the growing labor force. The unskilled and uneducated rural masses have continued to struggle in the primary sector. For reasonably economic betterment of the masses, there is an imperative need to promote manufacturing and allied supportive activities in the economy. Economic development means a gradual switch from lower- to higher-value of goods and services.

Some of the more significant sectors from the point of view of employment and infrastructure registered very much lower growth. Services have accounted for around 54 percent of GDP. There is always scope for improvement, and the 2011 to 2012 base year deflators haven’t yet attained robustness. The FIRE sector (finance, insurance, real estate, along with other professional services) increased by 22 percent in a 7-year period (between 2011–2012 and 2017–2018), while trade, hotels, transport, communication, and services related to broadcasting increased by 19 percent. By contrast, value added in agriculture, forestry, and fishing went up by only 14 percent, and core and basic industries like electricity, gas, water supply, and other utility services increased by only 2 percent over the entire period. Value added in manufacturing rose by nearly 18 percent, according to data from corporate industry rather than from the industrial production index. Services account for only around a quarter of employment—and the bulk of those jobs are in low-paid and productivity services, in contrast to professional services, which are expanding most rapidly in income terms. The primary sector, which continues to employ well over half the recorded workforce, accounts for only around 18 percent of GDP. Meanwhile, manufacturing remains largely stable in terms of both income and employment shares, at around 18 percent.

What emerges is that farmers have essentially been saved by rearing livestock, a segment that has grown in terms of real value added and has thereby caused increase farm incomes to increase over the period, even though this increase is still well below the growth of incomes in other sectors. By 2016–2017, income from livestock had accounted for 30 percent of agricultural incomes. The livestock economy, which has become the mainstay of farmers, needs to be protected and nurtured (Chandrasekhar and Ghosh 2018).

The shares of different sectors of the economy, in terms of overall GVA during the period 2011–2012 to 2017–2018, and corresponding annual growth rates are presented in Table 10.3.

Table 10.3 Composition or distribution of national income by industrial origin

The growth in real GVA during 2017–2018 has been lower than that in 2016–2017, mainly because of relatively lower growth in “agriculture, forestry and fishing,” “mining and quarrying,” “manufacturing,” “electricity, gas, water supply, and other utility services,” “communication and services related to broadcasting,” and “real estate, ownership of dwelling, and professional services.” During 2017–2018, at constant prices, the growth rates of the primary sector (comprising agriculture, forestry, fishing, and mining and quarrying), the secondary sector (comprising manufacturing, electricity, gas, water supply and other utility services, and construction) and the tertiary (services) sector have been estimated at 5.0 percent,
6.0 percent, and 8.1 percent as against 6.8 percent, 7.5 percent, and
8.4 percent, respectively, in the previous year.

Endnotes

1. 1. Joseph E. Stiglitz, Amartya Sen, and Jean-Paul Fitoussi. n.d. “Report by the Commission on the Measurement of Economic Performance and Social Progress.” https://ec.europa.eu/eurostat/documents/118025/118123/Fitoussi+Commission+report, (accessed September 4, 2019).
2. 2. Ibid.
3. 3. Sandipan Deb. April 7, 2019. “The 21st Century Needs a New Method to Compute GDP.” MINT. https://www.livemint.com/opinion/columns/opinion-the-21st-century-needs-a-new-method-to-compute-gdp-1554659501382.html, (assessed September 9, 2019).
4. 4. New Series Estimates of National Income, Consumption Expenditure, Saving and Capital Formation (Base Year 2011-12). January, 2015, Ministry of Statistics and Programme Implementation, Press ­Information Bureau, Government of India. https://pib.gov.in/newsite/mbErel.aspx?relid=115084, (accessed March 10, 2020).
5. 5. The Economic Times, May 31, 2018. India’s per capita income grows by 8.6% to Rs 1.13 lakh (US$ 1535) in FY18. https://economictimes.indiatimes.com/news/economy/indicators/indias-per-capita-income-grows-by-8-6-to-rs-1-13-lakh-in-fy18/articleshow/64403632.cms?from=mdr, (accessed March 10, 2020).