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An Overview of the Indian Economy

Economic Growth: refers to increase over time in a country’s real output of goods
and services (GDP in short). It is a narrow term and does not include development.
Economic Development: implies progressive changes in the socio-economic
structure of a country. Further, development goals are defined in terms of
progressive reduction in unemployment, poverty and inequalities. It is a wider term
and also includes economic growth.

It is difficult to interpret the term “under-developed economy”. Loosely, it refers to

countries in which the per capita income is lower and is less than a quarter of the
per capita incomes of countries like USA, Canada, Australia and Western Europe.
The under-developed is therefore relative. More recently, instead of referring to
these economies as underdeveloped, the United Nations (UN) prefers to describe
them as “developing economies”. The term “developing economies” signifies that
though still underdeveloped, the process of development has been initiated in these
countries.

Modern development economists define development as a process involving

elimination of poverty, income inequalities and unemployment. In this framework,
underdevelopment is a situation characterized by the worst kind of deprivation.
According to Jacob Viner, development potential of a country is a much better
criterion to judge the extent of its underdevelopment. Therefore, he defines an
underdeveloped country as the one “which has good potential prospects for using
more capital or more labour or more available natural resources or all of these to
support its population on a higher level of living”.
The Indian Planning Commission defines an underdeveloped country as “one which
is characterized by the coexistence, in greater or less degree, of unutilized or
underutilized manpower on one hand, and of unexploited natural resources on the
other”.
The definitions given by Jacob Viner and the Indian Planning Commission appears to
be quite scientific and logical as it focuses its attention on basic characteristic of
underdeveloped countries and also highlights their development potential.

The World Bank in its World Development Indicators Report (2014) classifies the
countries on the basis of Gross National Income (GNI) per capita. Countries are
divided into the following broad categories;
1) Low-income countries = US$ 709 average
2) Middle-income countries = US$ 4,751 average
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a) Lower middle income

b) Upper middle income
3) High-income countries = US$ 39,820 average

India’s GNP per capita is estimated at US$ 1,570 in 2013-14. GDP per capita (in
current USD) details by World Bank for the year 2017-2018 are given as under;
a) Denmark USD 60,595
b) France USD 14,163
c) China USD 9770
d) Brazil USD 8920
e) India USD 2015

As per the World Bank reports, India is expected to accelerate its growth rates
starting Financial Year (FY) 2017-18 after a setback in 2016-17 due to demonization
of high value currency notes (Rs. 500 and Rs. 2000). India is expected to grow at
7.7% by FY 2020 with a gradual revival of private sector investments.

As per the Central Statistics Office (CSO) data, in the year 2016-17 India’s GDP stood
at Rs. 121.65 crores and GVA stood at Rs. 111.68 crores. In the year 2017-18, GDP
and GVA bounced back and grew at 7.2% (after being low at 6.5%) and 6.7%
respectively, after the effects of Demonetization started to fade away.

The state of Maharashtra contributes maximum to India’s GDP about 14% in 2016-
17, followed by Tamil Nadu at 8.3% and most populated of Uttar Pradesh at 8.1% on
3rd position, followed by Gujarat (7.57%) and Karnataka (7.52%). Mizoram (0.11%),
Sikkim (0.13%), Arunachal Pradesh (0.13%) and Manipur (0.14%) are the least
contributing states to India’s GDP with less then 1% of contribution.

Sector-Wise Contribution:
The Gross Value Added (GVA) at current prices for services sector is estimated at
92.26 lakh crore INR in 2018-19, making it the largest sector in India. Services
sector contribution accounts for 53.9% of total India's GVA of 169.61 lakh crore INR.
With GVA of Rs. 50.43 lakh crore, Industrial sector (inclusive of manufacturing)
contributes 29.1%. While, Agriculture and allied activities sector share stands at
17.0%.

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The contribution of Agricultural sectors contribution to both employment and

India’s GDP have been declining. For industrial sector, the contribution went up in
the last 10 years but at present it is stagnating. Services sector contribution to
employment and country’s GDP has been increasing at a steady rate.

Human Development Index (HDI):

The HDI was created to emphasize that people and their capabilities should be the
ultimate criteria for assessing the development of a country, not economic growth
alone. The HDI can also be used to question national policy choices, asking how two
countries with the same level of GNI per capita can end up with different human
development outcomes. These contrasts can stimulate debate about government
policy priorities.

The Human Development Index (HDI) is a summary measure of average

achievement in key dimensions of human development: a long and healthy life (life
expectancy), being knowledgeable (education) and have a decent standard of living
(std of living). The HDI is the geometric mean of normalized indices for each of the
three dimensions. Based on HDI, countries are divided into 4 categories as follows;

a) Very high human development – Norway, Australia, Sweden, Denmark, USA, UK

b) High human development – Seychelles, Mauritius, Mexico, Sri-Lanka, Brazil,
China
c) Medium human development – India, Pakistan, Egypt, Zambia, Iraq
d) Low human development – Zimbabwe, Nigeria, Afghanistan, Sudan

http://hdr.undp.org/en/content/human-development-index-hdi
http://hdr.undp.org/en/composite/HDI

Common Characteristics of Underdeveloped / Developing Countries:

1) Low GNP per capita
Marked by existence of low per capita income, mainly due to inadequate and faulty
education system with no skill development programs. Naturally population leads a
wretched life under inhuman conditions.

2) Scarcity of capital
The rate of capital formation is low LDCs due to widespread poverty – low income –
low demand + low savings – low investments – caught in vicious circle of poverty.
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When the absolute income is high, the ability to save is also high. Saving rate
continues to be as low as 20% of GDP in most of the LDCs.

3) Excessive population growth

High birth rates coupled with low death rates leading to population explosion in
India. Population in LDCs have been increasing at 2% per annum or more over the
past few decades which is detrimental to economic growth and puts pressure on the
domestic economy. Fast growing population is both a cause and an effect of
underdevelopment

4) Low levels of productivity

Productivity of labour in LDCs is usually low which further results in low income
and therefore poverty. This is mainly due to the absence of adequate health and
medical facilities and malnutrition that is associated with children in LDCs. The
labour also suffers from mass illiteracy, which does not guarantee them
employment in other sectors except agriculture.

5) Technological backwards
Since new technology is expensive and requires a considerable degree of skills for
their application, this twin requirements for absorption of new techniques is
unavailable in LDCs like India. Further, LDCs also lack adequate research and
development in the field of technological application.

6) High incidences of poverty

The incidences of extreme and absolute poverty are quite high in LDCs that leads to
the vicious circle of poverty. Excessive poverty is prevalent also due to excessive
population growth. The definitions of poverty change from country to country,
however, wiping out of poverty is very important in a country like India.

7) High levels of under and unemployment

Due to excessive population growth, the number of unemployed people is huge in a
country like India. And even for the government, it is difficult to provide gainful
employment to the entire working population.

8) Lower levels of human well being

The average calorie intake of food is low for people in LDCs, which affect their
productivity. It is 2,496 calories per person per day in LDCs as compared to 3,400 in
most developed countries. The minimum intake for sustaining life is estimated at
2,100 calories per person per day. It is very doubtful if the poor in India even
receive the minimum required set of calories.
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9) Wide income inequalities (even regionally)

Income and regional inequalities is another characteristic feature of LDCs of the
world. From an equity perspective, the estimation of opportunities matters more
than the distribution of income.

10) Occupational pattern – agrarian

The primary occupation of people in LDCs is agriculture, which is associated with
lower, uneven and unsustainable incomes. Plus agriculture in India is also
characterized by disguised unemployment. Absence of alternative employment
opportunities in our villages further aggravates the problem. Still 30-40% people
directly depend on agriculture for their livelihood.

11) Lower participation in foreign trade

Exports of LDCs are lower than their imports, due to several reasons. They are
exporters of primary goods such as processed food items, fruits, tea, coffee and
spices that fetch a lower price in the international market and have stagnating
demands.

12) Inflation
Inflation is general rise in prices in a country. As a country develops, it is
characterized by growing incomes, growing aggregate demands and therefore
inflation. Usually for a developing countries like India, inflation in single digit as a
percentage of GDP is considered manageable, ofcourse a lot of other indicators are
also to be looked at.

13) Excessive dependence on developed countries

LDCs lack advanced technology and capital and have more imports of manufactured
goods, which makes them dependent on developed nations.

National Income: Concept And Measurement

Definition of National Income (NI):

National income is the final outcome of all economic activities of a nation valued in
terms of money. National income is the most important macroeconomic variable
and determinant of the business level and economic environment of a country. The
level of national income determines the level of aggregate demand for goods and
services. Its distribution pattern determines the pattern of demand for goods and
services, i.e., how much of which good is demanded. The trend in national income
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determines the trends in aggregate demand, i.e., the demand for the goods and
services, and also the business prospects. Therefore, business decision makers need
to keep in mind these aspects of the national income, especially those having long-
run implications. National income or a relevant component of it is an indispensable
variable considered (used) in demand forecasting.

According to Simon Kuznets, NI is defined as, “the net output of commodities and
services flowing during the year from the country’s productive system in the hands
of ultimate consumers”.

Importance of National Income Analysis:

1) For the Economy:
National income data are of great importance for the economy of a country. These
days the national income data are regarded as accounts of the economy, which are
known as social accounts. These refer to net national income and net national
expenditure, which ultimately equal each other.

Social accounts tell us how the aggregates of a nation’s income and output result
from the income of different individuals, products of industries and transactions of
international trade. Their main constituents are inter-related and each particular
account can be used to verify the correctness of any other account.

2) National Policies:
National income data forms the basis of national policies such as employment
policy, or population policy, since these figures enable us to know the direction in
which the industrial output, investment and savings, etc. should change and that
what measures can be adopted to bring the economy on the right path.

3) Economic Planning:
In the present age of planning, the national data are of great importance. For
economic planning, it is essential that the data pertaining to a country’s gross
income, output, saving and consumption from different sources should be available.
Without these, planning is not possible.

4) Formation of Economic Models and Research:

The economists propound short-run as well as long-run economic models in which
the national income data are very widely used. The research scholars and several
private institutes also make use of the national income data in order to make
estimations and forecasting.
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5) Per Capita Income:

National income data are significant for a country’s per capita income, which reflects
the economic welfare of the country. Higher the per capita income, higher will be the
economic welfare of the country.

6) Distribution of Income:
National income statistics enable us to know about the distribution of income in the
country. From the data pertaining to wages, rent, interest and profits, we learn of
the disparities in the incomes of different sections of the society. Similarly, the
regional distribution of income is revealed.

It is only on the basis of these that the government can adopt measures to remove
the inequalities in income distribution and to restore regional equilibrium. With
a view to removing these personal and regional inequalities, the decisions to levy
more taxes and increase public expenditure also rest on national income statistics.

Concepts of National Income (NI):

a) Gross National Product (GNP):

Of the various measures of national income used in national income analysis, GNP is
the most important and widely used measure of national income. It is the most
comprehensive measure of the nation’s productive activities. The GNP is defined as
the total market value of all the final goods and services produced in a year in a
country plus net income earned from exports (Exports-Imports) and plus net incomes
earned from abroad (Receipts-Payments) (made to foreigners). Two things must be
noted in this regard. First, it measures the market value of annual output and
therefore it is a monetary measure. Secondly, for calculating GNP accurately, all the
goods and services produced in any given year must be counted only once. Final
goods are those goods, which are purchased for final use or consumption only and
not for resale or further processing. For example, cotton is an intermediate good
whereas a t-shirt is a final good.

GNP = C + I + G + (X-M) + (R-P)

C = Consumption Expenditure

I = Investment Expenditure

G = Government Expenditure
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X = Exports

M = Imports

R = Receipts from foreigners

P = Payments made to foreigners

 Consumption: The value of the consumption of goods and services acquired and
consumed by the country’s households. This accounts for the largest part of GDP.
 Capital Spending by Businesses: Expenditure on purchases of fixed assets and
unsold stock by private businesses.
 Government Spending: All consumption, investment, and payments made by
the government for current use.
 Net Exports: Represents the country’s Balance of Trade (BOT), where a positive
number bumps up the GDP as country exports are more than it imports, and vice
versa.

b) Net National Product (NNP):

NNP is defined as GNP minus depreciation, i.e., NNP = GNP – Depreciation. Briefly
speaking, in the process of producing goods and services (including capital goods), a
part of total stock of capital is used up. ‘Depreciation’ is the term used to denote the
worn out or used up capital. It refers to the wear and tear of capital assets, which
takes place during the process of production. It is also known as capital
consumption. An estimated value of depreciation is deducted from the GNP to arrive
at NNP.

The NNP, as defined above, gives the measure of net output available for
consumption and investment by the society (including consumers, producers and
the government). NNP is the real measure of the national income. NNP = NNI (net
national income). In other words, NNP is the same as the national income at factor
cost. It should be noted that NNP is measured at market prices including direct
taxes. Indirect taxes are, however, not a point of actual cost of production.
Therefore, to obtain real national income, indirect taxes are deducted from the NNP.
Thus, NNP–indirect taxes = Real National Income.

NNP = C + I + G (X-M) + (R-P) – Depreciation (D)

NNP = GNP – D
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c) Gross Domestic Product (GDP):

The Gross Domestic Product (GDP) is the sum total of the market value of all final
goods and services produced in the domestic economy by the nationals of the country.
It refers to the money value of goods and services produced by residents within the
geographical boundaries of a country, during a period of one year. It does not include
net factor income earned from abroad. It therefore does not include incomes earned
by Indians abroad.

The concept of GDP is similar to that of GNP with a significant procedural difference.
In case of GNP the incomes earned by the nationals in foreign countries are added
and incomes earned locally by the foreigners are deducted from the market value of
domestically produced goods and services. In case of GDP, the process is reverse –
incomes earned locally by foreigners are added and incomes earned abroad by the
nationals are deducted from the total value of domestically produced goods and
services.

GDP = C + I + G + (X-M) – (R-P)

GDP = GNP less Net Income from Abroad


d) Net Domestic Product (NDP) = C + I + G + (X-M) – (R-P) – Depreciation (D)

NDP = GDP – D

NDP = NNP – (R-P) (D is already subtracted from NNP)

Depreciation equals the loss of national capital in the process of production. 


e) Gross Value Added (GVA) = It is used for measuring gross regional domestic
product and other measures of the output of entities smaller than a whole
economy. It provides the rupee value for the amount of goods and services
produced in an economy after deducting the cost of inputs and raw materials that
have gone into the production of those goods and services. It also gives sector-
specific picture like what is the growth in an area, industrial or agricultural
sector of an economy.
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National Income at Market Price and Factor Cost:

When GDP is measured on the basis of current market price, it is called GDP at
current prices or nominal GDP or national income at market price. We add
indirect taxes since actual transacted price includes indirect taxes such as GST,
Customs duty etc.

GDPMP = GDPFC + Indirect Taxes – Subsidies

While economic activities generate flow of goods and services, on one hand, they
generate money flows, on the other, in the form of factor payments – wages
(labour), interest (capital), rent (land) and profits (entrepreneurship). Thus, adding
the factor earnings and adjusting the sum for indirect taxes and subsidies also
generates national income. The national income obtained by aggregate of factor
earnings is known as national income at factor cost. In Economic Survey of India,
we use GDP at factor cost.

GDPFC = GDPMP – Indirect Taxes + Subsidies

We suppose that in a particular year, GDPFC is Rs. 100. In the same year Indirect
Taxes are at Rs. 20, while the subsidies are at Rs. 25. We can therefore arrive at
GDPMP with the following equation;

GDPFC = GDPMP – Indirect Taxes + Subsidies

Rs. 100 = GDPMP – Rs. 20 + Rs.25
Therfore, GDPMP = Rs.100 + Rs.20 – Rs.25 = Rs.95

Methods of Measuring National Income:

There are three standard methods of measuring the national income. They are
product / output (or value added) method, income (or factor cost) method and
expenditure method. All the three methods would give the same measure of national
income, provided requisite data for each method is adequately available. Therefore,
any of the three methods may be adopted to measure the national income.
a) Product Method: It measures the value of goods and services produced (in
terms of price) in an economy in a given year. It is also known as Value Added
Method. In the consumption of national income, ‘Value Added’ by different
enterprises is included and not the ‘ Value Of Output’. It looks at national income
from the production side. Here the entire national economy is considered as an
aggregate of producing units.
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b) Income Method: It measures the flow of factor incomes generated during the
production process in a given year. It is also known as the Factor Cost Method.
By factor income, we mean – rent for land, wages for labour, interest for capital
and profits for entrepreneur. This helps in understanding the contribution made
by different factors of production in the economy. It measures national income
in terms of payments made to primary factors of production (land, labour,
capital and entrepreneur). Here national economy is considered as combination of
factor-owners and users.

c) Expenditure Method: It measures the flow of expenditures on final goods and

services at market prices during an accounting year in a country. This enables us
to understand the consumption, savings & investment behavior of the economy.
It looks at national income from the expenditure side. Here the entire national
economy is viewed as a collection of spending (expenditure) units.

Choice of Methods:
Since all the three methods are not suitable for all the economies simply for non-
availability of necessary data and for all purposes. Hence, the question of choice of
method arises.

The two main considerations on the basis of which a particular method is chosen
are:

(i) The purpose of national income analysis

(ii) Availability of necessary data

If the objective is to analyze the net output or value added, the net output method is
more suitable. In case the objective is to analyze the factor-income distribution, the
suitable method for measuring national income is the income method. If the
objective at hand is to find out the expenditure pattern of the national income, the
expenditure or final products method should be applied. However, availability of
adequate and appropriate data is a relatively more important consideration is
selecting a method of estimating national income.

Nevertheless, the most common method is the product or output method because:
firstly, this method requires classification of the economic activities and output
thereof which is much easier than to classify income or expenditure; and secondly,
the most common practice is to collect and organize the national income data by the
division of economic activities. Briefly speaking, the easy availability of data on
economic activities is the main reason for the popularity of the product or output
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method.

It should be however borne in mind that no single method can give an accurate
measure of national income since the statistical system of no country provides the
total data requirements for a particular method. The usual practice is, therefore, to
combine two or more methods to measure the national income. The combination of
methods again depends on the nature of data required and sectorial break-up of the
available data.

History of measurement of National Income in India:

The earliest estimate of India’s national income was made by Dadabhai Naoroji in
1867–68. Since then many attempts were made, mostly by the economists and the
government authorities, to estimate India’s national income. These estimates differ
in coverage, concepts and methodology and are therefore not comparable. Besides,
earlier estimates were mostly for one year; only some estimates covered a period of
3 to 4 years. It was therefore not possible to construct a consistent series of national
income and assess the performance of the economy over a period of time.

In India, a systematic measurement of national income was first attempted in 1949,

when the National Income Committee (NIC) was appointed with P.C. Mahalanobis as
its Chairman, and D.R. Gadgil and V.K.R.V. Rao as its members. The NIC not only
highlighted the limitations of the statistical system of that time but also suggested
ways and means to improve data collection systems. On the recommendation of the
Committee, the Directorate of National Sample Survey Organization (NSSO) was set
up in early 1950, under the Ministry of Statistics of the Government of India, to
collect additional data required for estimating national income. Besides, the NIC
estimated the country’s national income for the period from 1948–49 to 1950–52.
In its estimates, the NIC also provided the methodology for estimating national
income, which was followed till 1967.
In 1967, the task of estimating national income was given to the Central Statistical
Organization (CSO). 1967 onwards, the CSO adopted a relatively improved
methodology and procedure, which had become possible due to increased
availability of data. The improvements pertain mainly to the industrial classification
of the activities. The CSO publishes its estimates in its publication, “Estimates of
National Income”. CSO was set up on 2nd May 1951. It is entrusted with the
responsibility of analyzing the data so collected by NSSO. It is responsible for
coordination of statistical activities in the country and evolving and maintaining
statistical records.
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In order to have a governing body, the National Statistical Organization (NSO) was
established on 20th July 2005 by the central government of India. 2015 onwards,
with the establishment of National Statistical Commission – the CSO and NSSO will
be merged into a single entity called NSO. It will function as the executive wing of
the government of India in the field of statistics. The NSO will have two wings i.e.
CSO and NSSO.

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Current methodology used in India:

In India, the expenditure method of calculation of national income is to be simply

ruled out because the information about a large part of personal expenditure that
takes place on account of households is difficult to get. Even in case of the income
method, in an underdeveloped country like India, the corporate income for which
statistics are readily available constitutes a very small part of the total income and
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 are taxed for income
obtained from agriculture. In case of the output method, the country is
appropriately placed because statistics about production and prices of a number of
goods and services are available in India. Hence the output method can be usefully
employed for estimating the output of any sector of the Indian 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 is
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 other non-agriculture sectors, like professions, teaching
and tourism, 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.

Currently, net output (product) and (factor) income methods together are used by
the CSO to estimate the national income of the country. The output method (or value
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added method) is used for agriculture and manufacturing sectors, i.e., the
commodity producing sectors. Income method is used for the service sectors
including trade, commerce, transport and government services. At present, the
national income is being estimated at both constant and current prices. In its
conventional series of national income statistics from 1950-51 to 1966-67, the CSO
had categorized the income in 13 sectors. But, in the revised series, it had adopted
the following 15 break-ups of the national economy for estimating the national
income; (i) Agriculture; (ii) Forestry and logging; (iii) Fishing; (iv) Mining and
quarrying; (v) Large-scale manufacturing; (vi) Small-scale manufacturing; (vii)
Construction; (viii) Electricity, gas and water supply; (ix) Transport and
communication; (xii) Real estate and dwellings; (xiii) Public Administration and
Defence; (xiv) Other services; and (xv) External transactions.

Difficulties or Limitations in Measuring National Income:

There are many conceptual and statistical problems involved in measuring national
income by the income method, product method and expenditure method.

1) Lack of reliable data:

Reliable data, facts abd figures of personal income are generally not available.
Professionals do not want to disclose their actual income earned. This in turn leads
to under-estimation of national income.

2) Self-Employed persons:
Another problem arises with regard to the income of self-employed persons. In their
case, it is very difficult to find out the different inputs provided by the owner
himself. He might be contributing his capital, land, labour and his abilities in the
business. But it is not possible to estimate the value of each factor input to
production. So he gets a mixed income consisting of interest, rent, wage and profits
for his factor services. This is included in national income.

3) Goods kept for self-consumption:

In under-developed countries like India, farmers keep a large portion of food and
other goods produced on the farm for self-consumption. The problem is whether
that part of the produce, which is not sold in the market, can be included in national
income or not. If the farmer were to sell his entire produce in the market, he will
have to buy what he needs for self-consumption out of his money income. If, instead
he keeps some produce for his self-consumption, it has money value, which must be
included in national income.
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4) Wages and salaries paid in kind:

Another problem arises with regard to wages and salaries paid in kind to the
employees in the form of free food, lodging (stay), clothes and other amenities.
Payments in kind by employers are included in national income. This is because the
employees would have received money income equal to the value of free food,
lodging, etc. from the employer and spent the same in paying for food, lodging, etc.

5) Services of housewives:
The estimation of the unpaid services of the housewife in the national income
presents a serious difficulty. A housewife renders a number of useful services like
preparation of meals, serving, tailoring, mending, washing, cleaning, bringing up
children, etc. She is not paid for them and her services are not including in national
income. Such services performed by paid servants are included in national income.
The national income is, therefore, underestimated by excluding the services of a
housewife.

When a teacher teaches his own children, his work is also not included in national
income. Similarly, there are a number of goods and services which are difficult to be
assessed in money terms for the reason stated above, such as painting, singing,
dancing, etc. as hobbies.

6) Intermediate and final goods (double counting):

The greatest difficulty in estimating national income by product method is the
failure to distinguish properly between intermediate and final goods. There is
always the possibility of including a good or service more than once, whereas only
final goods are included in national income estimates. This leads to the problem of
double counting which leads to the overestimation of national income.

7) Second-hand goods and assets:

Another problem arises with regard to the sale and purchase of second-hand goods
and assets. We find that old scooters, cars, houses, machinery, etc. are transacted
daily in the country. But they are not included in national income because they were
counted in the national product in the year they were manufactured. If they were
included every time they are bought and sold, national income would increase many
times.

8) Illegal activities:
Income earned through illegal activities like gambling, smuggling, illicit extraction of
wine, etc. is not included in national income. Such activities have value and satisfy
the wants of the people but they are not considered productive from the point of
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view of society. But in countries like Nepal and Monaco where gambling is legalized,
it is included in national income. Similarly, horse racing is a legal activity in England
and is included in national income.

9) Price changes:
National income by product method is measured by the value of final goods and
services at current market prices. But prices do not remain stable. They rise or fall.
When the price level rises, the national income also rises, though the national
production might have fallen.

On the contrary, with the fall in the price level, the national income also falls, though
the national production might have increased. So price changes do not adequately
measure national income. To solve this problem, economists calculate the real
national income at a constant price level by the consumer price index.

Key Highlights of Economic Survey 2018-19

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Economic Survey of India 2019-2020 – Key Pointers

The Economic Survey, written by Chief Economic Adviser to the Government of

India, Krishnamurthy Subramanian and tabled in Parliament by Finance Minister
Nirmala Sitharaman, has set a target of achieving a sustained 8% growth rate on the
back of investments to support exports-led growth to achieve the Prime Minister’s
goal of making India $5 trillion economy by 2024-25.
Major reforms were undertaken over the past year. The transformational
Goods and Services Tax (GST) was launched at the stroke of midnight on July
1, 2017.
On 8th of November 2016, the Government of India announced the
demonetisation of all Rs. 500 and Rs. 1,000 banknotes of the Mahatma
Gandhi Series.

1) Consumption and Investments: The survey said investment can be a ‘key

driver’ of simultaneous growth in demand, jobs, exports & productivity. It said
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India needs to almost double its annual spending on infrastructure to $200

billion and the real challenge lies in harnessing private investment.

2) Jobs and MSMEs: The Survey observes that once small firms know that they
would receive no benefit from continuing to remain small despite ageing, their
natural incentives to grow would get activated. This will generate economic
growth and employment. "According to the extant policy, certain targets have
been prescribed for banks for lending to the micro, small and medium (MSME)
sector that exacerbates perverse incentives to firms to remain small," the survey
said.
The manufacturing sector (or large scale industries) requires an investment of Rs. 5
lakhs to generate employment to 1 person whereas the MSME sector generates
employment for 7 persons with the same amount of investment.

3) Push to reforms: The Survey said the moderation in growth momentum was
mainly on account of lower growth in agriculture, trade, transport
communication and services related to broadcasting, among others.
Agricultural reforms (on contract farming, marketing reforms etc) may be
announced in order to achieve the government’s stated objective of doubling farmer
income by 2022, according to Antique Stock Broking.

4) Boost to infrastructure: Terming highways as a catalyst for economic growth,

the Economic Survey said private sector investments in the sector remained
‘tardy’ as such investors are interested in putting their money only on a short-
term basis.
Brokerage Prabhudas Lilladher believes tax-free bonds may be reintroduced to fund
long-term infrastructure projects.

5) Banking and NBFCs: The survey said performance of the banking sector has
improved as bad loans declined in last fiscal, but financial flows are constrained
due to a fall in money raised from capital markets and stress in the non-banking
financial sector.
B Gopkumar, ED & CEO, Reliance Securities said elevated banking sector Non-
Performing Assets (NPAs) and defaults on debt repayment in the Non-Banking
Financial Company (NBFC) has created a crisis in the financial sector.

6) Water management: The Weather Department has projected fewer rains in

some region, which could affect the crop production in those areas, the Survey
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said. It also called for framing new policies to improve water use efficiency in the
agriculture sector.
Market experts are expecting thrust on improving drinking water availability and
river linking. If “Swacch Bharat” was key focus of Modi during his first tenure, the
“Nal se Jal” is likely to be the focus in his next tenure.

7) Updates on smart city: The Survey also showed that projects worth over Rs
2.05 lakh crore are proposed in 100 cities under the Smart Cities Mission and a
significant progress has been made in terms of implementation of these projects.
B Gopkumar forsees a rise in capex of railways and defense, higher allocation to
smart cities and rural electrification schemes.