END TERM PROJECT ON MACRO ECONOMICS

TOPIC: GDP

SUBMITTED TO:
Dr C. Anirvinna

SUBMITTED BY:
Roopali Trivedi- 140701005
Ravi Sharma- 140701027
Rajat Gadia- 140701023
Sourabh Saxena- 140701041

Topic: GDP Of India

INDEX

SR.NO
1

TOPIC
GDP Introduction

Potential & Actual GDP

Ravi Sharma

Nominal GDP & Real GDP

Sourabh Saxena

How GDP is calculated

Sourabh Saxena

GDP Data of Last 10 Years

Rajat Gadia

How the output is measured

Rajat Gadia

Change in the Base Year

Rajat Gadia

Why is the GDP growing?

Roopali Trivedi

How GDP can be increased?

Roopali Trivedi

10

GDP & Inflation relation

Roopali Trivedi

Topic: GDP Of India

PG. NO

CONTRIBUTED BY
Ravi Sharma

INTRODUCTION
GDP- GDP is the market value of all the final goods and services produced within a country
within a given period of time which includes Taxes and excludes Subsidies on the products.
The equation of GDP is:
GDP = C + I + G + (X-M)
Where,
Consumption (C) - Includes personal consumption goods.

Investment (I) - Includes Gross Private Investments such as Fixed Deposits etc.

Government Purchases (G) - This category includes government spending various items.

Net Exports (X-M)- This is calculated by subtracting a nations imports (M) from exports (X).
In simple terms GDP is the national income of a country in a given period of time.

INDIAS CURRENT GDP STATSQuarter 1 (Q1): April 2014- June 2014 - 5.7.
Up from previous quarters 4.6% expansion and 4.7% growth a year earlier.

Quarter 2 (Q2): July 2014- Sept 2014 5.3%.

It grew at a slower pace compared to previous quarter.

Topic: GDP Of India

TYPES OF GDP
Actual GDP- Actual GDP is the sum of the value added by all the economic activities in an
economy.
But Actual GDP may be lower the potential GDP that is equal to the maximum sum of value of
added possible by all the economic activities by fully utilizing the capital, labor, technology and
natural resources available to the economy.

Potential GDP- Potential GDP is some kind of estimate of the maximum possible GDP by fully
utilizing the capacity / capability of all the factors/ input of production.

GDP Gap = Potential GDP - Actual GDP

7% 5.3% (For the year 2014-15)
So, here the GDP Gap is 1.7

Topic: GDP Of India

Source: www.tradingeconomics.com

NOMINAL GDP:
A gross domestic product (GDP) figure that has not been adjusted for inflation is known as
Nominal GDP. It can be misleading when inflation is not accounted for in the GDP figure because
the GDP will appear higher than it actually is. Nominal GDP is current year output at current year
price, even if theres no actual increase in production or value created, inflation would lead to a
continuous rise in nominal GDP.

REAL GDP:
The nominal GDP thus doesnt make much sense as an indicator of economic growth. GDP is
instead calculated on prices with respect to a given base year and these inflation adjusted prices
give a true or real account of economic growth. The base year is changed periodically to account
for structural changes in the economy, and since Jan 2010, we have been using 2004-05 prices.
But as per the new release the base year have been shifted to 20011-12.

REAL GDP= X 100

Here GDP Deflator shown above is a tool to measure inflation.

Topic: GDP Of India

NOMINAL VS REAL GDP

The main difference between nominal and real values is that real values are adjusted for inflation,
while nominal values are not. As a result, nominal GDP will often appear higher than real GDP.
Nominal values of GDP (or other income measures) from different time periods can differ due to
changes in quantities of goods and services and/or changes in general price levels. As a result,
taking price levels (or inflation) into account is necessary when determining if we are really better
or worse off when making comparisons between different time periods. Values for real GDP are
adjusted for differences in prices levels, while figures for nominal GDP are not.

HOW IT IS CALCULATED?
There are basically three methods to calculate GDP Expenditure Method
Income Method
Production Method

Expenditure Method.
There are consumers, Firms, Government and some foreign investors in an economy who
are spending on products and services, when the expenditure made by them is added
together is GDP. Here expenditure made on final goods and services is only added.
For Example you have purchased a bread then in this case you will add the final expenditure
made on bread only you will not add all the expenses made to purchase the raw material
used to make the final product

Income Method
In this method we calculate the income of the firms, workers & income of all other
organisations in the economy and then when you add them all together to get the total GDP
of the economy.
GDP = Labour wages + Capital income + Government income + Net income from
Abroad (National of our economy working in Abroad) + Depreciation

Topic: GDP Of India

Production Method
Here you add up the production of all newly produced goods and services in the economy,
here one thing is to be kept in mind that one should not add up the products that are
intermediate of the final goods produced. Here value added by each industry is added on
to find total GDP i.e. Value of final product value of intermediate product, double
counting is avoided

The following equation is used to calculate the GDP

GDP=C+I+G+ (XM)
Written out, the equation for calculating GDP is:
GDP = private consumption + gross investment + government investment + government
spending + (exports - imports)
In India GDP is calculated by Central Statistical Office (CSO). In India, the quarterly GDP releases
with a delay of approximately two months with respect to the end of the reference period. For
Instance- the data for Fourth Quarter (Jan-Mar) 2011-12 were published on 31st May 2012.
Central Statistical Office or CSO, is responsible for coordination of statistical activities in India,
and evolving and maintaining statistical standards. Its activities include compilation of National
Accounts; conduct of Annual Survey of Industries and Economic Censuses, compilation of Index
of Industrial Production, as well as Consumer Price Indices. It also deals with various social
statistics, training, international cooperation, Industrial Classification etc.
Every time any GDP number is released, 2 different numbers for GDP are released, one for the
base year prices which currently is 2004-05(Real GDP) , which are inflation adjusted prices and
one for the current prices (Nominal GDP) or market price. Base Year keeps on changing. The
current year is 2011- 2012. The reason for periodically changing the base year is to take into
account the structural changes which have been take place in the economy and to depict a true
picture of the economy through macro aggregates like GDP, consumption expenditure, capital
formation etc.
In India the two ways used are Production and Expenditure Approach
Production Approach: It breaks down the economy into different sectors such as agriculture,
forestry, fishing, mining, manufacturing, electricity etc. and then computes the value that has been
added in each sector. This is reported as ESTIMATES OF GDP BY ECONOMIC ACTIVITY
Expenditure Approach: is calculated by adding what everyone has spent. A common equation for
GDP calculation is:
GDP = Private or Consumer Consumption(C) + Government (G) + Investment (I) + Net
Exports (NX)

Topic: GDP Of India

IN INDIA, GDP IS CALCULATED IN TWO DIFFERENT WAYS:

By economic activity (at factor cost)

This figure is derived by breaking down the economy into different sectors and calculating the
net increment in value in each sector. The data for year 2013-14 is in the table that follows:
Source: www.tradingeconomics.com

GDP at factor cost(INR in crores)

Percentage
Change

Q3, 2012-13

Q3, 2013-14

2013-14

1. Agriculture, forestry & fishing

241556

250316

3.6

2. Mining & quarrying

27400

26960

-1.6

3. Manufacturing

215582

211540

-1.9

4. Electricity, gas & water supply

25799

27090

5. Construction

106094

106726

0.6

6. Trade, hotels, transport & commn.

367319

382998

4.3

7. Financing, ins., real est. & bus. servs.

261960

294751

12.5

8. Community, social & personal servs.

166073

177771

TOTAL

1411784

1478152

4.7

Industry

Thus GDP for the year 2013-14 is 4.7% using the above method.

Topic: GDP Of India

GDP At factor Cost Data

Year

2011

-12

Quarter

Q1

Q2

Q3

GDP at factor cost

7.5

6.5

6.0

2012

-13

2013-14

Q4

Q1

Q2

Q3

Q4

Q1

5.1

5.4

5.2

4.7

4.8

4.4

Source: Quarterly review 2013-14 ministry of finance Department of economic affairs

By expenditures (at market price)

This method simply adds up the market value of all domestic expenditures made on final goods
and services in a single year, including consumption expenditures, investment expenditures,
government expenditures, and net exports. Add all of the expenditures together and you determine
GDP. This data is useful to understand government spending as well as trends in investment

Item

GDP at Market Prices (INR in crores)

Private Final Consumption Expenditure

981463

Government Final Consumption Expenditure 190713

Gross Fixed Capital Formation

497120

Change in Stocks

26692

Valuables

41085

Exports

389655

Less Imports

484157

Discrepancies

-47279

GDP at market prices

1595293

Topic: GDP Of India

Topic: GDP Of India

WHAT ARE THE REASONS THAT GDP GROWTH RATE OF INDIA HAS DECLINED?
In India, GDP growth of India was 9.48% in 2005-2006 ,and it was suddenly decreases to 4.74%
in 2012-2013 .The reasons for that fall are below discussed-:
1. Inefficient use of money by government-:
To minimize the impact of 2008 global crisis, govt. came up popular scheme like MNREGA.
Scheme of this type have one thing in common, that is, spending is far more than the value of work
done. In short a huge amount of money was not utilized to its potential. This scheme has put a lot
of money in hands of poorest of Indians. As they spend the money, this increase demand. To meet
that demand supply need to rise .But due to poor infrastructure supply could not increase as fast
as demand, resulting in increase in inflation.
2. Inflation-:
Inflation in India is resulting in lesser domestic savings. This leads to banks having less money to
give loans. This causes the interests rates to go up. Higher interest rates means less investment,
resulting in less supply, more inflation, less GDP.
3. Scams, Environmental clearances, Gov. inaction-:
In past years India have witnessed big scams like 2G, coalmining scam, and iron ore mining scam.
All of this have created a very negative environment. Govt. is too busy in holding on to power.
This has resulted in sort of inaction by govt. Even in areas where it is necessary. There are tons of
infrastructure project proposals pending due to not getting environmental clearances. This is
causing the supply not being able to scale up demand and persistent inflation.
4. Twin Account Deficit-:
This means FD and CAD at the same time. To start with lesser export and more demand of
gold, higher crude oil prices in global market resulted in more CAD. This has resulted in two
things, weakening of Rupee and adversely impacting outlook of India as an investment destination.
Given that import > export, weakening of Rupee increased cost of import, make situation worse.

Topic: GDP Of India

5. Global Factors, FDI and FII-:

Bleak situation in Europe and USA have resulted in lesser export from India. Along with this
investors are looking for safer investment and India is certainly not among the safest places to
invest in world. This has resulted in FIIs withdrawing money for India and also lesser inflow of
FDI. This results in less supply, more inflation, less GDP.

Key Factors responsible for GDP Rate fall-:

1. Global economic slowdown
2. Poor performance and incompetence of manufacturing sector
3. Rising inflation and poor domestic demand
4. Sluggish demand for Indian textiles abroad
5. Policy inertia of the government
6. Lack of skilled manpower in India
7. Inadequate infrastructure
8. Competition from China affecting many exporting units
9. Increased subsidies and protection

Topic: GDP Of India

Topic: GDP Of India

Rate of Growth (% YoY) at Current Prices

CHANGE IN THE BASE YEAR

The government change the base year from 2004-05 to 2011-12
Here are 10 things to know about the GDP revision:
1) So far, domestic GDP was calculated at factor or basic cost, which took into account prices of
products received by producers.
2) The new formula takes into account market prices paid by consumers. It is calculated by adding
GDP at factor price and indirect taxes (minus subsidies). It is in line with international practice
and is expected to better capture the changing structure of the Indian economy.
3) The government has also changed the base year for estimating GDP from 2004-05 to 2011-12.
This has been done to incorporate the changing structure of the economy, especially rural India.
4) Data for the new GDP series will now be collected from 5 lakh companies (against 2,500
companies earlier), HSBC says. Under-represented and informal sectors as well as items such as
smartphones and LED television sets will now be taken into account to calculate the gross domestic
product.
5) India's GDP grew at a healthy 6.9 per cent in fiscal year 2013-14 and not 4.7 per cent as reported
earlier, according to the revised methodology. This means the previous UPA government was
doing much better when it came to managing the economy than what was thought earlier, analysts
say.
6) According to Nomura's Sonal Varma, India's manufacturing sector contributed to 17.3 per cent
in FY14 GDP (against 12.9 per cent estimated earlier). Private consumer demand was growing at
a much faster pace than estimated earlier, perhaps explaining the sustained inflation surge, she
added.
7) The revision in GDP does not alter the size of India's economy ($1.8 trillion) nor will it alter
key ratios such as fiscal deficit, CAD etc. (as percentage of GDP) for 2013-14.
8) The RBI will assess the new GDP data to set its monetary policy stance. This means the quantum
of rate cuts in the coming few months may not be as large as earlier expected because the economy
is growing faster-than-estimated.
9) India will grow at 6.6 per cent (against 5.5 per cent forecast) and cross Brazil and Russia in
GDP this year to emerge as the second largest BRIC after China.
10) The revised methodology, however, poses several challenges as well. It is a problem for the
government and economists who are trying to understand the exact situation. It is even a problem
for the RBI, that doesn't have a full view about how the economy is performing.

Topic: GDP Of India

WHY IS THERE A SURGE IN INDIAN ECONOMIC GROWTH?

There was nothing to cheer about in the GDP rates the previous years. But 2014, has a different
tale to tell. A surge that is here to stay. If the Indian Inc is to believed, it is just a start to the current
governments magic.
Lets have a look at some reasons that turned the table in 20141. Business Confidence Witnessed an Upswing
There was an optimism about the new government's policies which attracted investors back in the
country.
The Modi led government has vowed to revive the economy and create jobs, a promise that raised
the hopes of millions of middle class and youth.
2. Manufacturing Sector Sees Signs of Revival
The manufacturing sector, which accounts for nearly 14% of the economy, grew an annual 3.5%,
higher than the previous quarter's contraction of 1.4%.
A positive sentiment after Modi was elected to power the business and economic environment in
the country would improve and that could have led to increased activity in the manufacturing
sector.
At the consumer level one important reason for the growth in the manufacturing sector could be
improving car sales. Lets take an example of Maruti Suzuki, India's largest car maker. For the
period April to June 2014, the car sales for the company stood at 270,643 units, up 10.3 percent
from April-June 2013.
The Make In India propaganda might have also been one of the potential reasons for the growth in
this sector.
3. Faster projects approval
The new government kicked into gear by clearing billion dollars worth of long-delayed defense
projects, including a big navy base, as well as approving the scaling-up of one of the country's
biggest dams.
As good as 240 projects were approved by Prakash Javadekar- the Environment Minister.
The hastening of approvals could spur investment worth Rs. 200,000 crores and help revive the
economy.
The clearances bought in fresh investments and gave infrastructure sectors like roads, power plants
and oil exploration a boost.
4. Service SectorThe services sector, which contributes to as much as 60% of the economy, rose to 6.8% in the June
quarter compared with 6.4% in the previous quarter. Business services such as finance, insurance,
Topic: GDP Of India

and professional services like IT also exhibited high growth. Growth in the trade, hotels, transport
and communications segment also inched up to 2.8 per cent in the first quarter from 1.6 per cent
in the same period of 2013-14.

THE SEESAW GAME OF INDIAN ECONOMY

After touching the 5.7 growth mark, the Q3 results showed a decline. India's economy grew at a
slower 5.3% during July to September. The manufacturing sector which is 15% contributor to the
economy expanded by just 0.1%. The farm sector, which includes agriculture, forestry and fishing,
also recorded deceleration in growth by 3.5 per cent compared to 4.5 per cent in the same period
a year ago.
However, with governments target to get Manufacturing Sector to 25% and strict determination
to revive the economy, one can forecast that Indias GDP performance will be better in FY 20152016.

GDP AND INFLATION- THE COMPLEMENTARY DUO

What is the relation between GDP and Inflation? Lets take an example and understand.
If economic output is declining or merely holding steady, most companies will not be able to
increase their profits as the Agg. Demand goes down resulting in deflation. On the other hand, too
much GDP growth is also dangerous, as it will most likely come with an increase in inflation. Most
economists today agree that 2.5-3.5% GDP growth per year is the most that our economy can
safely maintain without causing negative side effects (inflation and near to full employment). But
where do these numbers come from? In order to answer that question, we need to bring a new
variable, unemployment rate, into play.
Studies have shown that over the past 20 years, annual GDP growth over 2.5% has caused a 0.5%
drop in unemployment for every percentage point over 2.5%. It sounds like the perfect way to kill
two birds with one stone - increase overall growth while lowering the unemployment rate, right?
Unfortunately, this positive relationship starts to break down when employment gets very low, or
near full employment. Extremely low unemployment rates have proved to be more costly than
valuable, because an economy operating at near full employment will cause two important things
to happen:
a) Aggregate demand for goods and services will increase faster than supply, causing prices to
rise.
b) Companies will have to raise wages as a result of the tight labor market. This increase usually
is passed on to consumers in the form of higher prices as the company looks to maximize profits.
Over time, the growth in GDP causes inflation, and inflation might cause hyperinflation. Once this
process is in place, it can quickly become a self-reinforcing feedback loop. This is because in a

Topic: GDP Of India

world where inflation is increasing, people will spend more money because they know that it will
be less valuable in the future. This causes further increases in GDP in the short term, bringing
about further price increases. Thus a 10% inflation can get the economy into twice trouble as
compared to a 5% inflation rate.

PROVIDING A CANE TO THAT CRIPPLING ECONOMY

The ways by which the Indian Economy can be bought back to life are:
1. A well-designed GST
A well designed and implemented GST can boost GDP growth by 2%. For GST to be successful,
all states and the Centre should implement it in a similar fashion. This will attract investments. As
tax cascading disappears, the industry will move to the covering regions because of lower costs
and thus bring these into the growth dynamics.
2. Make in India policy
The new government is working hard to achieve 25% manufacturing output by 2020. If India
becomes a manufacturing hub, it will create job opportunities and improve the GDP.
3. Public Private Partnership
Disinvestments of loss making public unit and starting infrastructure projects on a PPP deal can
help boost our economy. The PPP can also get better foreign technology that will improve the
output.
4. Cut Imports of unnecessary items and improving competitiveness of Exports
The country needs to improve the relative competitiveness of exports, expand into new export
geographies and attempt some import substitution by domestic production.
5. Decreasing Subsidies to necessary commodities
Subsidies are necessary and are provided in all countries but there should be proper policies
regarding the final user of these subsidies. Practices like Black-marketing should be under strict
scrutiny.
6. Infrastructure Projects and Opening up of FDI avenues
The government should boost up expenditure by the means of infrastructure projects of
constructing dams, highways, roads etc. It can also involve foreign players in this process.
However, no economy can completely rely on just the Fiscal Policy. It requires a double dose i.e.
bringing Monetary Policy in the picture.
7. Training of workforce
The manufacturing sector cannot develop on its own without skilled labor force. The creation of
appropriate skill would definitely set rural migrants and the urban poor on a track towards inclusive
growth. That would be a vital step for boosting manufacturing.

Topic: GDP Of India