Measuring National Income in India: Present Method

Let us make an in-depth study of the present method for measuring national income in India.

The estimates of national income of a country obtained by adopting the three methods of measuring national income should produce the same figure.

This is because it is the same thing – final goods and services – which is being looked at from three different angles.

In the first method, it is straightway the national output that is evaluated.

In the second method, it is the income accruing from production and sale of goods and services which is accounted for.

And in the third method, it is the expenditure on these goods and services which is estimated.

It should, however, be noted that in practice there is a possibility of discrepancy being found among the three estimates. This may be because statistics of certain items to be included in national income are not available, or certain items may escape the estimator’s notice.

In such cases, suitable adjustments are made in the estimates. Each one of the three methods is useful, the utility depending upon the problem being analysed. The best thing for a country then is to have estimates based on all these methods. In case this is not possible, national income of a country can be estimated by either of the three methods, or a combination of these.

Which of these methods of measuring national income is most suitable for a country depends upon its level of development and the availability of data. In advanced countries, where data required for using all the three methods are available, all the methods are used at the same time to compute national income. Estimation from the three angles makes it possible to compare the three estimates and also helps to analyse problems for different purposes. This however is not simply possible in India.

In this country, the expenditure method is to be simply ruled out because information about a large part of personal expenditure that takes place on account of households is difficult to get. In case of the income method, the difficulty is no doubt less. But even this method cannot be used as the only one. On the one hand, in an underdeveloped country like India, the corporate income for which statistics are readily available constitutes a very small part of the total income.

On the other hand, in case of agriculture, which accounts for a substantial part of national income, it is not possible to get correct income figures. For large numbers of agricultural producers do not keep accounts, nor are they taxed for income obtained from agriculture.

It is, therefore, not possible to collect income data either directly from producers or indirectly from the tax department. In ease of the output method, the country is not so badly placed because statistics about production and prices of quite a number of goods and services are available. Hence the output method can be usefully employed for estimating the output of any sector of the economy.

In the case of India, therefore, output method seems to be more appropriate. But to improve upon the credibility of net output estimates, it is essential that it should be combined with the income method for sectors where the latter can be more effectively used. For example, in agriculture, there is no alternative but to use the output method. But in some segments of the non-agriculture sector, like professions, the income method can be used. The combination of these two methods is thus the natural consequence of the present economic situation of the country.

Procedure of Estimation of India’s National Income:

We may now describe the procedure adopted in estimating India’s national income. The principal aspects of estimation relate to the selection of methods applicable to the various sectors, collection of information and sectoring of the economy.

Method:

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, etc. 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. We know that 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 the value of 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, i.e., depreciation. In the income method, the procedure is to find out the number of people working in a profession, and their per head earnings.

The two are then multiplied to get the total value of income contributed by the profession. But in respect of construction the commodity-flow approach has been adopted. It envisages estimation of the value of domestic production of the commodities used in construction and adjusting the same for changes in stocks, import and exports.

Data:

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, etc., in various bulletins and publications more or less on a continuous basis.

There are then National Sample Surveys supplying data on specific subjects. Moreover, reports like those of the Rural Credit Survey, Indian Rural Debt and Investment Survey have been made use of. Further, various censuses of population have also been used to estimate the work force in the absence of comprehensive employment statistics in various professions.

Since adequate and up-to-date data on output and costs are not available in case of certain goods and services, arbitrary imputations are made. In some cases, even data emanating from field surveys and local inquiries are made use of for estimating certain costs.

Sectors:

The Central Statistical Organisation (CSO) which has the responsibility of preparing national income estimates has divided the economy into 13 sectors, grouped under five main headings. It 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.

These sector headings with the sub-sectors belonging to each are as follows:

1. Primary:

(i) Agriculture;

(ii) forestry and logging;

(iii) fishing; and

(iv) mining and quarrying;

2. Secondary:

(v) manufacturing, subdivided into

(a) registered and

(b) unregistered;

(vi) construction;

(vii) electricity, gas and water supply.

3. Transport, Communication and Trade:

(viii) transport, storage and communication, subdivided into

(a) railways,

(b) transport by other means and storage,

(c) communication;

(ix) trade and hotels and restaurants;

4. Finance and Real Estate:

(x) banking and insurance;

(xi) real estate and ownership of dwelling and business services;

5. Community and Personal Services:

(xii) public administration and defence; and

(xiii) other services.

The combination of methods used, the type of data collected, and the nature of the sectoring of the economy conform to the realities of the stage of development of the Indian economy. Even when a mixed method of obtaining net output figures is employed, the estimates so made are quite in accord with the definition of national income, and its various components. We can say that with the advancement of the economy; the quality of the estimates will further improve.