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IRMA TOPIC:
THE INDIAN ECONOMY: issues relating to India’s national income and its composition; per capita
income, etc.

Related Information:

India’s National Income

The study of National Income is important because of the following reasons:

To see the economic development of the country.

To assess the developmental objectives.

To know the contribution of the various sectors to National Income.

Internationally some countries are wealthy, some countries are not wealthy and some countries are in-between. Under such
circumstances, it would be difficult to evaluate the performance of an economy. Performance of an economy is directly
proportionate to the amount of goods and services produced in an economy. Measuring national income is also important to chalk
out the future course of the economy. It also broadly indicates people’s standard of living.

Income can be measured by Gross National Product (GNP), Gross Domestic Product (GDP), Gross National Income (GNI), Net
National Product (NNP) and Net National Income (NNI).

In India the Central Statistical Organization has been formulating national income.

However, some economists have felt that GNP has a measure of national income has limitation, since they exclude poverty,
literacy, public health, gender equity and other measures of human prosperity.

Instead they formulated other measures of welfare like Human Development Index (HDI)

Calculating National Income

There are various methods for calculating the national income such as production method, income method, expenditure method
etc.

Production Method
The production method gives us national income or national product based on the final value of the produce and the origin of the
produce in terms of the industry.

All producing units are classified sector wise.

Primary sector is divided into agriculture, fisheries, animal husbandry.

Secondary sector consists of manufacturing.

Tertiary sector is divided into trade, transport, communication, banking, insurance etc.

Income Method:
Different factors of production are paid for their productive services rendered to an organization. The various incomes that includes
in these methods are wages, income of self employed, interest, profit, dividend, rents, and surplus of public sector and net flow of
income from abroad.

Expenditure Method:
The various sectors – the household sector, the government sector, the business sector, either spend their income on consumer
goods and services or they save a part of their income. These can be categorized as private consumption expenditure, private
investment, public consumption, public investment etc.

Calculation of National Income of India: A Brief History

The first attempt to calculate National Income of India was made by Dadabhai Naroji in 1867 -68. This was followed by several
other methods. The first scientific method was made by Prof. V.K.R Rao in 1931-32. But this was not very satisfactory. The first
official attempt was made by Prof.P.C.Mahalnobis in 1948-49, who submitted his report in 1954.

Difficulties in Calculation of National Income

In India there are various difficulties in calculating the national incomes .The most severe one is the finding of reliable data. Most of

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the time, it is based on assumptions. Soon after independence the National Income Committee was formed to collect data and
estimate National Income. The two major problems which remain in the calculation of National Income are:

Most of the data is not from the current year.

Even if current data are available then values are underreported.

Obstacles in High Growth of National Income of India

Even if the Indian economy grows faster than the BRIC countries and G 6, the benefits of the growth would not be evenly distributed.
India’s progress in education cannot be termed as satisfactory. In terms of higher education it has achieved tremendous success,
but its unsatisfactory performance in primary education and secondary education has been a major obstacle to growth. Similarly
India’s healthcare system is in a less than desirable state. Governments’ spending on public health has not been up to the required
levels.

An Excerpt from the National Income Report for 2009 Quarter 1(Q1)

Quarterly GDP at factor cost at constant (1999-2000) prices for Q1 of 2009-10 is estimated at Rs 8,30,555 crore, as against Rs.
7,82,619 crore in Q1 of 2008-09, showing a growth rate of 6.1 per cent over the corresponding quarter of previous year.

The economic activities which registered significant growth in Q1 of 2009-10 over Q1 of 2008-09 are, ‘mining & quarrying’ at 7.9
per cent, ‘electricity, gas & water supply’ at 6.2 per cent, ‘construction’ at 7.1 percent, ‘trade, hotels, transport and communication’
at 8.1 per cent, ‘financing, insurance, real estate and business services’ at 8.1 per cent, and ‘community, social and personal
services’ at 6.8 per cent. The growth rates in ‘agriculture, forestry & fishing’ and ‘manufacturing’ are estimated at 2.4 per cent and
3.4 per cent respectively during this period.

According to the information furnished by the Department of Agriculture and Cooperation (DAC), which has been used in compiling
the estimate of GDP from agriculture in Q1 of 2009-10, the production of crops rice, wheat, coarse cereals and pulses during the
Rabi season of 2008-09 (which ended in June 2009) recorded growth rates of 3.8 per cent, 2.6 per cent, 25.6 per cent, and 18.2
per cent, respectively over the production in the corresponding season of previous agriculture year. Among the commercial crops,
the production of oilseeds increased by 13.6 per cent during the Rabi season of 2008-09, while the production of cotton and
sugarcane recorded growth rates of (-)10.5 per cent and (-) 22.1 per cent, respectively during the agriculture year 2008-09.

For a complete reading of the report, visit:

http://www.mospi.nic.in/PRESS_NOTE_Q1_31aug09.pdf

Per Capita Income

Per capita income means how much each individual receives, in monetary terms, of the yearly income generated in the country.
This is what each citizen is to receive if the yearly national income is divided equally among everyone. Per capita income is usually
reported in units of currency per year. When comparing nations per capita income reflects gross national product per person, but it
is also used to compare municipalities within nations. When determining the per capita income of a community, the total personal
income is divided by the population.

Per capita income is often used as a measure of the wealth of the population of a nation, particularly in comparison to other nations.
It is usually expressed in terms of a commonly-used international currency such as the euro or United States dollar, and is useful
because it is widely known and produces a straightforward statistic for comparison. It is the average income a person in the country
is earning.

Particularly when comparing countries with substantially different levels of wealth, however, it has several weaknesses as a
measurement.

Economic activity that does not result in monetary income, such as services provided within the family, or for barter, are usually not
counted. The importance of these services will vary widely between different economies, both between countries and among
different groups within a country. Per capita income gives no indication of the distribution of that income within the country, so a
small wealthy class can increase the measured per-capita income far above that of the majority of the population. As for the per
capita income of the majority of the population, using the median income or Amartya Sen's welfare function is the more appropriate
approach.

Differing currency exchange rates between countries mean that a given amount of money (for example, one US dollar) has differing
values in different places.

Newspaper Article on India’s Per Capita Income

The average Indian's income in 2007-08 has nearly doubled since the turn of the millennium and even adjusting for inflation, it has
The quick estimates of per capita income for 2007-08, put out by the Central Statistical Organisation (CSO), peg per capita
income for that year at Rs 33,283 in current prices. In 2000-01, the per capita income was only Rs 16,688 or roughly half of the
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2007-08 figure.

In inflation-adjusted or real terms, the growth in incomes has been much more modest, but by no means insignificant. In terms of
constant (1999-2000) prices, the per capita income was Rs 16,173 in 2000-01 and rose to Rs 24,295 by 2007-08. That's a rise of
just a little more than 50% over a seven-year period.

Much of this sharp rise in average income levels has happened in the five years starting 2003-04. Thus, the 2007-08 figures were
76% higher than those of 2002-03 in nominal terms and 42% higher in inflation-adjusted terms. That's because the economy grew
at 12%-plus rates in nominal terms for each of these five years or 7.5%-plus rates in real terms.

Even allowing for the population growing at a little under 1.5% per year, that meant that incomes grew by double-digit rates —
between 10.5% and 13.5% — in each of these years. In inflation adjusted terms, that translated into five successive years of
incomes rising by over 5% - between 5.6% and 8.2% to be precise.

The five-year phase of rapid growth in the economy, and the average incomes, seems likely to end in the current financial year
when the economy could end up growing by anywhere between 5% and 7% in real terms, depending on which estimate one
chooses to believe.

If the 7% growth projected officially does materialize, we could have a sixth successive year of 10%-plus growth in nominal per
capita income and 5%-plus increase in the inflation adjusted average income level.

Financial Inclusion

Financial Inclusion is the delivery of banking services at affordable costs to vast sections of disadvantaged and low-income
groups. Unrestrained access to public goods and services is the sine qua non (absolutely essential feature)of an open and efficient
society. It is argued that as banking services are in the nature of public good, it is essential that availability of banking and payment
services to the entire population without discrimination is the prime objective of public policy. The term Financial Inclusion has
gained importance since the early 2000s, and is a result of findings about Financial Exclusion and its direct correlation to poverty.
Financial Inclusion is now a common objective for many central banks among the developing nations.
The Reserve Bank of India set up a commission (Khan Commission) in 2004 to look into Financial Inclusion and the
recommendations of the commission were incorporated into the Mid-term review of the policy (2005-06). In the report RBI
exhorted the banks with a view of achieving greater Financial Inclusion to make available a basic "no-frills" banking
account.

For more information visit:

http://www.myrada.org/rms/rms46.htm

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