National income in India

EEIP IIPMB

1. National Income in India

2. The Importance of National Income To measure the level of country’s economic performance. To compare the economic growth in relation to previous year(s ) and also with the Rest of the World. To know the composition and structure of the national income in terms of various sectors and the periodical variations in them. To make projections about the future development trend of the economy. To help government formulate suitable development plans and policies and targets for different sectors of the economy. To help producers in forecasting future demand for their products.

3. Introduction An economy can be defined as an integrated system of production, consumption & Exchange In carrying out these economic activities, people are involved in buying and selling of goods and services. It is useful to understand the mechanism of income & expenditure flows How these flows are generated? How they make the system work?

4. Economic activities generate two kinds of flows: - Real flow: factor flow and goods flow - Money flow: factor payments Factor payment take form of expenditure flow on consumer goods and services The entire economic system can therefore be viewed as circular flows of income and expenditure Magnitude of these flows determine the size of national income

5. Four sectors - Household Sector - Business Sector - Government Sector - Foreign Sector

6. Models of Circular Flows Two-Sector Model including Household and the Business sector Three- Sector Model including household, business & Government Sector Four-Sector Model including household, business, Government & Foreign Sector

7. Two Sector Model An economy which consists of only households and firms operating in a closed economy

8. Two Sector Model Households Producers Goods & Services Factor Payments (R+W+I+P) Factor Services Payment For Goods & Services

9. Withdrawals & Injections In reality, however, there are leakages from and additions to the circular flows of income and expenditure The leakages and additions are also called withdrawals and injections, respectively.

10. Withdrawals Withdrawal is the amount that is set aside by the households and the firms and is not spent on the domestically produced goods and services over the period of time . Example a household sets aside a part of income for old age or against the loss of job. Saving is a withdrawal. When savings are invested, they take a form of injections Firms may also withhold a part of their total receipts and may not return it to the circular flows in the form of factor payments in anticipation of depression Such withdrawals reduce the size of circular flows

11. Injections Amount that is spent by households and firms in addition to their incomes generated within the regular economy Injection by the household may be in the form of spending inherited savings or the hoarding Firms can inject money by spending their retained earnings or borrowing from outside Injections increase the size of circular flows

12. Two Sector Model With Savings Entire money income generated by firms flows back again to the household as the factor payments and further to the firms . Households Producers Factor Services Factor Payments Goods & Services Payment For Goods & Services Capital Market Savings Borrowings Savings Borrowings

13. Three-Sector Model Households Producers Factor Payments Payment For Goods & Services Capital Market Savings Borrowings Savings Borrowings Government Savings Borrowings Transfer Payments Direct Taxes Subsidies Indirect Taxes

14. In a Three Sector Model Magnitude of flow between the households and the firms is reduced because a part of income flows to the government sector The household income is claimed by the government in the form of direct taxes A part of earnings of producers reaches in the form of corporate taxes Government imposes indirect taxes Government spends a part of this revenue in the form of factor payments and public expenditure and extends the subsidies Thus, money that flows to the government flows back to these sectors

15. Circular Flow in A four Sector Model Foreign sector consists of two kinds of international transactions Exports & imports of goods and services Inflow and outflow of capital

16. Four-Sector Model Households Producers Factor Payments Payment For Goods & Services Capital Market Savings Borrowings Savings Borrowings Government Savings Borrowings Transfer Payments Direct Taxes Subsidies Indirect Taxes ROW Payments for Exports Payments for Imports Payments for Exports Payments for Imports

17. Definition of National Income Money value of all final goods and services, produced in an economy of a country, during an accounting year, including net factor income earned from abroad.

18. Methods of Calculating National Income Product or Value added method Income method Expenditure method

19. GDP MP GDP FC NDP MP GNP MP GNP FC NNP MP (-) Net Indirect Taxes (+) Depreciation (-) Depreciation (+) NFIA (+) Net Indirect Taxes Relationship Between Macro Indicators (+) NFIA (+) NFIA

20. Some Related Concepts Personal Income : It is the income which an individual earns from all the sources . Personal Disposable Income : Personal Income – Direct Taxes Per Capita Income = National Income Total Population

21. Items not included Unreported Income   Illegal Activities Non Market Income   

22. Pre-Independence Estimates of National Income: No official body in India to prepare National Income estimate Prepared by some eminent personalities in their personal capacity .   Dadabhai Naoroji ,   prepared the first estimates of National income in 1876 . He estimated the national income by first estimating the value of agricultural production and then adding a certain percentage as non-agricultural production. However , such method can only been called as a non-scientific method.

23. The first person to adopt a scientific procedure in estimating the national income was  Dr. VKRV Rao  in 1931. He divided the Indian Economy into two parts: - Agricultural Sector which included agriculture, forests, fishing and hunting . - Corporate Sector which included industries, construction, business , transport and public services. Two different methods were used for estimating the income in the two sectors. - Product method was used for estimating income in agricultural sector. - Income method was used for estimating income in the corporate sector. Finally , Net Factor Income earned from abroad was added to the sum of the above two to obtain national income.

24. Difficulties and Limitations No Government Agency: All estimates were prepared at personal level. Incomplete and unreliable data Different methods: Choice of methods depended upon the preference of the person concerned. Different geographical areas: The income of the country was estimated on the basis of data collected from different geographical areas. Based on the current prices

25. Estimates of National Income after Independence The Government of India appointed  National Income Committee  in 1949 . The committee was chaired by Prof. P.C. Mahalanobis . Prof D.R. Gadgil and Dr. V.K.R.V. Rao were the members . The first report of the committee was presented in 1951. According to the first report, the National Income of India for 1948-49 was Rs . 8,710 crore . The report discussed Details of methods for the estimation of data on National Income. Various sources and limitations of data on national income

26. Central Statistical Organization Prepares National Income estimates in India since 1955. National Income may be calculated on current prices or at constant prices. Currently, the base year for measuring national income and per capita income at constant prices is  2011-12, introduced in Jan 2015. It has divided economy into three basic sector for the purpose of evaluation of various data. They are: Primary sector comprising agriculture, forestry, fishing, mining and quarrying. Secondary sector comprising manufacturing, power generation, gas and water supply  Tertiary sector comprising transport, communication and trade, banking insurance, computer software, public administration, defense and external trade .

27. Estimates of NI by CSO Conventional Series: Between 1952-1967, same methods of national income estimates were adopted as recommended by National Income Committee. 1948-49 was taken as base year After 1966, CSO discontinued the publication of conventional series First Revised Series In 1967, certain major changes introduced by CSO. 1960-61 was taken as base year instead of 1948-49 Economic activities were classified into three different sectors, viz ., Primary, Secondary and Tertiary Sector

28. Second Revised Series CSO introduced this series in 1978 1970-71 taken as base year instead of 1960-61 Third Revised Series CSO introduced this series in 1988 1980-81 taken as base year instead of 1970-71 Fourth Revised Series Introduced in 1999 1993-94 taken as base year Important methodological changes were introduced

29. 6. Fifth Revised Series Adopted in 2004-05 Base year was 1999-2000 7. Sixth Revised Series Adopted in 2009-10 Base year was 2004-05 8 . New Series   To present a more realistic picture of the economy, the government has released a new series of national accounts with 2011-12 as base year for computing the economic growth rate in January 2015.

30. Difficulties in Measuring National Income in India Prevalence of Non-monetized Sector Due to illiteracy most of the producers do not maintain any account of their income and expenditure. Production , both agricultural and industrial, is unorganized and scattered Lack of Statistical Data https://www.youtube.com/watch?v=iNfNZ1mIGRE (real GDP and GDP deflator) https://www.youtube.com/watch?v=iWsI48ZTz4E (concepts of national income)