NATIONAL INCOME

AND
OCCUPATIONAL STRUCTURE
OF
INDIA
 National Income

• According to the National Income Committee, “A national

income estimate measures the volume of commodities and
services turned out during a given period, counted without
duplication.”
• It is the money value of all final goods and services
produced in the economy.
• Moreover, the national income measures the flow of all
commodities and services produced in an economy. Thus,
the national income is not a stock but a flow.
• Only the value of final goods is considered. Intermediate
consumption is excluded. These refer to the raw materials or
those products that help in doing business.
• For instance, wheat for a baker or rice for a restaurant would
be Intermediate consumption.
• Thus, only the value of final goods and services is to be
included.
• National income data is used by planning authorities to
gauge regional disparities and formulate appropriate policies
to address the same.
• The national income statistics help diagnose the economic ills
of the country and at the same time suggest remedial
measures. The rate of savings and investment in an economy
also depend on the national income of the country.
• In contrast to national wealth which measures the stock of
commodities held by the nationals of a country at a given point
in time, national income measures the productive power to
turn out goods and services at a given point in time.
National Income at Current Prices

• Refers to the money value of all final goods and services

produced in the economy in an accounting year with
estimates based on prevailing prices.
• National Income and Per Capita Income figures are usually
collected at current prices.
• Not a true indicator of real growth as does not discount
inflation.
• If the increase in National Income is due to an increase in
production of goods and services, then it is an indicator of
real growth as it implies that there has been an increase in
production.
• However, an increase in National Income due to rising
prices represents an unreal growth inflicted by inflation.

National Income at Constant Prices

• Also called Real National Income
• Calculated by considering National Income estimates for
current year as per fixed base year.
• Helps deflate any change in price level during the period
• The base year in India was 2004-05 which has now been
changed to 2011-12.
 BASIC CONCEPTS OF NATIONAL INCOME

1. Gross and Net Concept

• Capital Assets experience a fall in value over a period of
time due to depreciation.
• Gross concept does not make any provision for depreciation
where as the net concept implies that provision for
depreciation has been made.

2. Domestic and National Concept

• Domestic refers to any income or output generated within the
domestic territory of a nation, whether produced by
residents or non residents i.e. foreigners.
• National refers to any income generated by residents and
non residents within and outside the borders of the country
• National Income is thus domestic income plus net factor
income from abroad.

3. Market Price and Factor Cost

• Factor Cost is the cost incurred in hiring the various factors
of production (Land, Labour, Capital and Enterprise).
• The cost of hiring these (Rent, Wages, Interest and Profits)
is the factor cost.
• Market price is the price at which a product is sold in the
market. It includes the cost of production in the form of 
Rent, Wages, Interest and Profits. It also includes
the taxes imposed by the government and the subsidies
provided by the government for the producers would also
be reflected in the price
• Thus, market prices are factor cost including the net indirect
taxes.
 NATIONAL INCOME AGGREGATES

1. Gross Domestic Product

• Monetary value of final goods and services produced within
the domestic territory of a country.
• Inclusive of depreciation as it is a gross concept

2. Net Domestic Product

• Monetary value of final goods and services produced within
the domestic territory of a country.
• Calculated after making deductions for depreciation.
• GDP minus depreciation.
3. Gross National Product
• Wider Concept
• Monetary value of final goods and services produced within
the country along with income from abroad.
• Does not include provision for depreciation

4. Net National Product

• Monetary value of final goods and services produced by a
country’s citizens, whether staying in the country or
overseas.
• Includes provisions being made for depreciation
 National Income Estimation- Methods

I. Value Added Method or Net Product Method

• Also called Net Output Method

• Considers national income from production side
• Done by considering the actual contribution made by each
producing entity in the economy in an year
• Value of only final goods and services included to avoid the
problem of double counting
• The contribution to GDP from various sectors like
agriculture, livestock, fishery, forestry and logging, mining
and quarrying etc. is estimated with the adoption of product
method.
• In this method, we estimate the gross value of product, by-
products and ancillary activities obtained by multiplying the
estimated output with their market price and then deducting
the value of inputs, raw materials and services from such
gross value to arrive at net value added in each sector.
I. Identification and Classification of a Productive Enterprise
Broadly classified into
1. Primary Sector
2. Secondary Sector
3. Tertiary Sector

II. Estimation of Net Value Added and Domestic Income

4. Calculation of Gross Value of Output
• Done by multiplying the entire output produced in the year
with it’s market price
2. Calculation of Gross Value Added at Market Price
• In this step, each enterprise in each sector estimates the
gross value added by it by subtracting the cost of
intermediate goods such as raw materials.
• Helps remove problem of double counting

3. Estimating the Net Value Added at Factor Cost

• Calculated by deducting depreciation and indirect taxes
• Indirect taxes are the taxes paid to the government minus
the subsidies received from the government
4. Calculation of Net Domestic Income at Factor Cost
• This is the Net Value Added at factor cost by all the sectors
i.e. primary, secondary and tertiary sector

III. Calculation of National Income

• The National Income is calculated by adding Net Factor
Income from Abroad to net domestic income at factor cost.
II. Net Income Method
• Also called as Factor Payment Method
• Considers national income from distribution side
• Estimation of national income is done by considering net
payments that accrue on all factors of production i.e. land,
labor, capital and enterprise
• The income approach is adopted where the process
involves the measurement of aggregate factor incomes in
the form of compensation of employees (wages and
salaries) and operating surplus in the form of rent, interest,
profits and dividends.
• Finally, by adding up the contribution of all different sectors
to national income of the country, it is necessary to obtain
net domestic product at factor cost. This is done by making
adjustments for net indirect taxes. In order to derive the net
national income at current prices, the net factor income
from abroad is added to net domestic product.
I. Identification and Classification of Productive Enterprise
Broadly classified into
1. Primary Sector
2. Secondary Sector
3. Tertiary Sector

II. Calculation of Domestic Income

Classified into
4. Compensation of Employees, includes wages and salaries,
allowances, pension, employer's contribution to social
security schemes
5. Operating Surplus, includes rent on use of land, interest on
investment in capital, profits
3. Income of self employed, such as doctors, lawyers chartered
accountants

III. Calculation of National Income

• Net factor income from abroad is added to domestic income
to arrive at national income
III. Expenditure Method
• Known as Consumption and Investment Method
• The Expenditure method does not give us the national
income figure directly, but it gives GDP at market price
• Involves calculation of national income from expenditure side
by adding all expenditure on goods and services done by
individuals and government in a year
Calculation of Domestic Income Based on

I. Private Final Consumption Expenditure

• This refers to the expenditure made by households on durable
goods (refrigerators, televisions, cars etc.), non-durable goods
(milk, vegetables, toothpaste etc.) and for the services of
professionals such as teachers, doctors, lawyers etc.
 
II. Government Final Consumption Expenditure
• This is the government spending upon final goods and
services and all direct purchases of resources including labor.
For example: Purchases of guns, tanks, missiles etc. for the
army.
III. Gross Domestic Capital Formation
• This includes Gross Fixed Capital Formation and consists
of purchase of machines, equipment, plants, tools etc. by
business firms, all construction activity such as factory
buildings, warehouses, store rooms, new residential houses
etc.

IV. Net Exports

• The difference between the total exports and the total
imports of goods and services.
V. Calculation of National Income
• The net factor income from abroad is added to the domestic
income to reach at national income

 
 Phases of National Income Growth

I. Modest Growth Rate Period (1951-1980)

• The annual rate of increase in national income was abysmally
low at 3.5% p.a during the first three decades of economic
planning
• It has increased to 5.9% p.a since 1980-81.
• Bolder targets were set in the five year plans but could’nt be
achieved.
• The national income had risen substantially only in the years of
exceptionally good harvests.
II. Growth Rate During the 1980’s
• There was acceleration of national income growth in 1980’s.
This economic buoyancy was attributed to state stimulus as
exports continued to grow, though at a slow pace. Constraints
blocking mass expansion were still operating.
• There were 3 factors that allowed the economy to register
higher growth as compared to 1960’s and 1970’s. First,
increased government expenditure or fiscal stimulus through
external commercial borrowings. Second, import liberalization
particularly for capital goods, manufacturing components etc.
Thirdly export promotion was encouraged to boost exports.
• According to various scholars and economists, the crisis
situation in the early 1990’s emanated from three factors;
excessive government spending leading to fiscal deficit,
excessive interference by the government in private
enterprise, export shortfalls.
III. Growth Rate During Liberalization Phase and Beyond
• During the Eighth Plan from 1992-93 to 1996-97 ,National
Income rose at the rate of 6.7% against the target of 5.6%
p.a.
• However, during the Ninth Plan, the National Income grew
by merely 5.5% which was significantly lower than the
previous plan. It was due to the failure of both agriculture
(2.5%) and manufacturing (3.3%).
• In the Tenth plan (2002-03 to 2006-07), India’s National
Income registered 7.5% growth on average.
• During the 21 year period from 1991-92 to 2011-12, the
rate of increase in the National Income saw a growth of
6.4% per annum.
 Features of Net National Product Growth

1. Erratic Growth
• Out of 60+ years of economic planning, in 12 yrs NNP has either
declined or the rate of increase is lower than population growth.
2.Growth Rate Fluctuations Due To Fluctuations in Agriculture
• Even today weather conditions particularly monsoon impact
agriculture and affect the performance of other sectors.
3. Growth Rate At Best is Modest
• The rapid income growth is concentrated in few regions which
suggests that most of the states have recorded low growth.
4. Post-1991 Reform Growth Less Fragile
• The studies in the context of “post reform” period done by
Arvind Virmani, Rodrik Dani and Arvind Panagariya agreed
that growth was higher but not significant.
• Panagariya’s study indicated that “the variance of growth
rates in 1980’s was statistically significant as compared to
1990’s”.
 Occupational Structure in India

I. Primary Sector (Agriculture)

• Concerned with exploitation of natural resources. For
instance cultivation, animal husbandry, dairy farming,
fisheries, forests and mining.

II. Secondary Sector (Industry)

• Activities related to production of industrial goods which
may be related to large or small scale units, construction
etc.
III. Tertiary Sector (Services)
• Activities related to rendering of services including both
private and government services like trade, banking,
insurance, education, transport, communication etc.
 Determinants of Occupational Structure

1. Specialization
• For example Germany specializes in production of automobiles
but have to import agricultural products to meet their domestic
requirements.
2. Productivity
• In countries with low productivity, large proportion of population
is engaged in agricultural and allied activities.
3. Government Policy
• If the objective of the government policy is rapid
industrialization, then it should announce a robust industrial
policy which provides various fiscal incentives and reliefs. The
occupational structure will be industry-oriented.
4. Climate
• Some countries have more suitable climate for agricultural
occupation, while other have industrial occupations. It also
relates to business and political climate
 Occupational Structure in India

Year Primary Sector Secondary Sector Tertiary Sector

1951 72.1% 10.7% 17.2%

1991 66.8% 12.7% 20.5%

2001 57.2% 17.6% 25.2%

2004 52.7% 18.8% 28.5%

According to 2011 Census, 24.6% (Cultivators), 30% (Agricultural Labor), 3.6%

(Household), 41.6% (Non-agricultural activities)
 Changes in Occupational Structure in India

1. A Sharp Decline in Cultivators

• More than half of the workforce is concentrated in agriculture.
However, around 8.9 million farmers, during 2001 and 2011,
moved away from self-cultivation in the total work force.
Around 14.9 million farmers of main workers category have
moved away from farming during the last two decades.
• The reasons include increased cost of cultivation, debt burden,
rapid urbanization attracting rural farmers to urban centers for
higher wages, acquisition of farmland for building SEZ’s etc.
2. Farmers Becoming Agricultural Laborers
• The workforce appears to be moving away from self-cultivation
to agriculture labor. It is evident from the fact that there is a
sizeable increase in the category of agricultural laborers. It is
about 38 million net additions to the size of agriculture laborers
during 2001-11.
• At this point one can say that most of those farmers who are
moving away from farming are becoming agricultural laborers.
3. Labor Force Absorption in Non-Agriculture Increasing
• It is observed that during the 2001-11, about 79 million is the
net addition to the total workforce.
• Of the total net addition to the workforce, during 2001-11,
one–third of it is absorbed in the agriculture and the rest in
the non-agriculture. Thus, a large part of the increasing labor
force is getting absorbed in non-agriculture.
4. Workforce Participation Rate
• In determination of the size of the labor force, it is important
to exclude children below the age of 15 and old people
above the age of 60.
• The Workforce Participation Rate in India is defined as the
proportion of working population to total eligible working
age population.
• It depends on factors such as age, gender composition,
attitude to work, availability of work, education etc.
5. Fast Decelerating Rate of Growth in Female
Workforce
• The analysis of recent census data 2011 reveals that overall
rate of growth in workforce is 1.8% between 2001-11 which
is marginally higher than that of the population.
• Further, the rate of growth in work force during the 2001-11
is lower than that of previous two decades (1980s & 1990s).
• The rate of growth in female workforce and their
population are almost the same between 2001-11. The
rate of growth in female workforce during 1980s and
1990s was 1.75 times higher than of its population.
6. Fast Growing Marginal Workers Category
• Census classifies workers into two categories i.e. main and
marginal workers. The main workers are those who worked for
more than six months in a year and the marginal workers are
those who worked for less than six months. The analysis of
data shows that during the last two decades (1991-2011), the
rate of growth in marginal workers is higher than that of main
workers.
• Marginal workers have grown to account for one-fourth of the
total workforce in India in 2011.
• The share of female marginal workers, accounting for about
40% of the total female workforce in 2011, is still considerably
higher than that of their male counterparts.
7. No Decline in Work Participation Rate (WPR)
• Census data shows a marginal increase in the WPR between
2001 and 2011 as the rate of growth in total workforce is
higher than that of population.
• This marginal rise is attributed to an increase of marginal
workers’ share in the total workforce, particularly since 1991.
• The WPR by gender shows that the males’ overall WPR
registered an increase in 2001 and 2011, whereas the
females’ overall WPR had increased in 1991 and 2001 but
remained same in 2011.
 Socio-Economic Census 2011

• Out of the country’s total 243.95 million households, nearly

three-fourths are in rural areas. However, only 30.1 per cent
of rural households depend on cultivation as their ‘main’
source of income. A majority 51.14 per cent derive
sustenance from manual casual labor (MCL); 56.25% of
rural households own no agricultural land.
• NSSO reports show India’s total agricultural workforce to
have registered a decline from 259 to 228 million between
2004-05 and 2011-12 — the first time in history — even as
the size of those engaged in non-farming sectors rose from
198 to 239 million.
 Relationship b/w Economic Development &
Occupational Structure
• As a country develops, there is a shift of workers from primary
to secondary & tertiary sector.
• Rise in manufacturing employment absorbs excess labor force
released from agriculture.
• Within manufacturing, there is expected shift from household to
non-household activities as the latter uses better technology.
• In the later stages of economic development, there is increase
in the % of population dependent on services. But for a country
like India that’s in the early stages of industrialization, this
increase is less than the increase in manufacturing.