Calculating India’s GDP

We analysts keep doing a number of estimations based on country’s GDP. Most of the variables are best remembered and analysed as % of GDP- investment, savings, market capitalization, exports, imports etc etc.  The growth rates in GDP and its components are one of the most important variables looked upon by analysts.

So, the question is how do we compute GDP? CSO provides an explanation (you need to register, it is free). As per National Income Accounting there are 3 ways to compute GDP:

  1. Product wise: Calculating the total production
  2. Income wise: Calculating the total incomes received by factors of production – labour & capital
  3. Expenditure wise: Calculating the total expenditure of all the entities.

In a way all the three are part of a cycle…You begin production by using factors (labour and capital) and then you pay them incomes which they eventually spend purchasing items of their need. So, which ever way you take it, each of the estimates, should provide you the same GDP. But all these calculations have errors and in reality we never have one figure.

In India, for all these years we have been getting GDP Product-wise i.e. we have 8 sectors, we calculate how much has been produced (value added that is) in each sector and aggregate it to get GDP figure. We also get GDP based on state levels.  

Now, for the first time, CSO has released GDP based on expenditure. I had missed this point when I last covered this development.

If you look at the Expenditure approach, it is the classic Keynesian equation:

Y =  C + I + G + (X-M)

Y – Income (or GDP)
C- Consumption (or Private Final Consumption Expenditure).
I- Investment (or Gross Final Consumption Exp)
X- Exports
M- Imports

So, now you have two ways to get your GDP number. And yes there are discrepancies which are mentioned in the press release.

What do the two kinds of GDP approaches tell me?

The Product approach tells me how much each sector is growing and contributing to GDP. For instance, whenever we read agriculture growing by this much, services by this much etc this approach is used.

The expenditure approach tells me whether GDP growth is happening via consumption or investment.

I have already mentioned about the recent developments in sectoral growth here and keep posting about it via IIP releases.  

Now, the expenditure approach tells me quite a few things:

  • Consumption contributes most to the GDP. PFCE is 62% of GDP in 2004-05 and has decreased to 58% in 2006-07.
  • Investment has been rising and has increased from 26% in 04-05 to 28% in 06-07.
  • This is consistent with the evidence provided in the Economic Advisory Council report (which I covered here). However, it looked at growth of personal credit as an indicator for consumption led growth, this is a better evidence of the same phenomenon. The report raised concern that India needs to move more to investment driven growth and we see that happening. However, magnitude of shift is pretty small.
  • The EAC report also said India needs to look at sprucing up exports but we don’t see that happening. The exports as a % of GDP has been falling and was at 17.6% in 06-07 compared to 18.4% in 2004-05. The same figure for imports has risen from 16.1% to 16.5% in the same period.

Hence a bit of mixed evidence, We see investments increasing but exports are falling. With rupee appreciation, the exports are going to fall further this year (I have covered it here).

Keep visiting this blog for further developments.

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16 Responses to “Calculating India’s GDP”

  1. Rahul Verma Says:

    Good site on Economics.

  2. GDP estimate Q1: 2007-08 « Mostly Economics Says:

    […] had mentioned earlier, CSO has also started giving GDP data based on expenditure as well. Indian growth story has been […]

  3. Differences between 2 GDP approaches « Mostly Economics Says:

    […] Differences between 2 GDP approaches GDO is calculated seperately in two ways and CSO has recently begun providing us data using the 2 approaches. I had written about this development here. […]

  4. Consumption distribution in India « Mostly Economics Says:

    […] my eye is the % distribution of consumption in India (statement 5.2). GDP can be calculated in three ways and the expenditurewise approach has a category called personal final consumption expenditure. […]

  5. Manavazhagan Says:

    Good aticle

  6. Sri Says:

    hi
    For this I learned lot many thing but I want to Confirm How many States will come Under the GDP calculation if we consider all the states then we will calculated on an Average basis (or) is there any other Method to calculate.

    Thanks & Regards
    Sri

  7. Radhakrishnan Arun Says:

    Dear Sir

    Is this GDP calculation is audited internationally or how to believe the figures of the each country’s contribution of GDP. There is a possiblity of altering the figures of GDP by their own, is n’t it? Sorry, I am a non economics man, that is why this question i am rising.

  8. sasikala Says:

    how they calculate GDPcalculation, i need one full clear example.sorry Iam a non commerce student.

    thank you

  9. rina Says:

    who calculates the gdp rate in india ? which division of the government ?

  10. Vijay Says:

    Any idea on where I can find state-wise GDP based on expenditure method? I am looking for state-wise consumption / GDP ratio.

    Vijay

  11. BJ Says:

    thnx u solved ma prob…

  12. Macro Economics Articles Says:

    Well effort. Your blog is really infomative. This article is back bone of macro economics and you explained it very well. Students and professsionals are getting help from it.
    Best regards,
    Arfan.

  13. Shakti Maira Says:

    Could you please help me understand the following: 1) In calculating GDP govt expenditures on items such as CommonWealthGames was included, right? The fact that a lot of this money was wasted doesn’t get subtracted does it? So would it be correct to say that some of the 8-9% GDP growth comes from quite wasteful govt expenditures? Is there any estimation of how much of our GDP growth is contributed by such wasteful/corrupt govt expenditures?
    2) The huge wheat procurements must be counted in GDP, right? Is there any negative counting for the wheat that rots in govt warehouses in our GDP figures?
    3) Is there any break-up available of private consumption expenditure – the largest item in our GDP – by products? I am curious to understand how much of our GDP growth may be coming from the growth in consumption of luxury products.

  14. Fahmida noor Says:

    This is very good artical.but i need more about this.

  15. Alok Rodinhood Kejriwal Says:

    Hi, sorry to request contact information via a comment, but I could not find any contact us link here.

    I am a digital entrepreneur in India and run a business called 2win (contests2win and games2win) and also manage a blog called therodinhoods.com – a social network for entrepreneurs.

    May I request your e-mail id? I have some ideas to collaborate.

    Alok Rodinhood Kejriwal
    alok@rodinhood.com

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