First attempt to compute National Income was made by DadabhaiNaoroji in 1867-68.   The per capita income was calculated to be Rs 20 per annum.

Per Capita Income = Total National Income / Total Population

National Income computation using scientific method was first done by V.K.R.V Rao in 1931-32. The Government of India appointed National Income Committee in in 1949 under the chairmanship of PC Mahalnobis in 1949. This committee computed National Income as Rs 8710 crore and per capita income was Rs 225. Since 1955, Central Statistical Office (CSO) has been computing National Income.

Real National Income (RNI): It Is The Value Of National Income Adjusted For Inflation And Calculated For Some Reference Point.   

RNI = (NNP at current prices / Price Index [1]) x 100

It is nothing but National Income at constant prices.

Price x Quantity = National Income  

Personal Income: It is the income of residents (individuals) of a country. 

PI = NI + Transfer Payments[2]– Social security contribution – corporate Tax – Undistributed Profits[3]

Personal Disposable Income = PI – Direct Taxes (mainly Income Tax)

Trends in Growth of National Income

Trends in Growth of National Income

Year	GDP growth rate
2015-16	7.1%
2016-17	6.7%
2017-18	7.2%
2018-19	6.8%

During 1950 – 80, growth rate is on an average 3.5% (and per capita income growth averaged 1.3% during the period) was criticized by Professor Raj Krishna as “Hindu Growth Rate”. This derogatory term refers to low annual growth rate of Indian Economy before 1991.  Growth rate started to increase during the period due to focus on heavy industries.

As per Economic survey 2018-19, for the global economy, the year 2018 was difficult, with the world output growth falling from 3.8 per cent in 2017 to 3.6 per cent in 2018. Growth rate of world output is projected to fall further to 3.3 per cent in 2019 as growth of both advanced economies and emerging & developing economies are expected to decline. Growth of the Indian economy moderated in 2018-19 with a growth of 6.8 per cent, slightly lower than 7.2 per cent in 2017-18.

Yet, India continued to be the fastest growing major economy in the world. India maintained its macroeconomic stability by containing inflation within 4 per cent and by maintaining a manageable current account deficit to GDP ratio. The current account deficit to GDP was higher in 2018-19 as compared to 2017-18, primarily due to higher oil prices, which were about 14 $/bbl higher in 2018-19 vis-à-vis the previous year. However, the current account deficit started to narrow in the third quarter of the year.

The manufacturing sector was characterized by higher growth in 2018-19 while the growth in agriculture sector witnessed tapering. Growth in investment, which had slowed down for many years, has bottomed out and has started to recover since 2017-18. In fact, growth in fixed investment picked up from 8.3 per cent in 2016-17 to 9.3 per cent in 2017-18 and further to 10.0 per cent in 2018-19. Net FDI inflows grew by 14.2 per cent in 2018-19.

Capital expenditure of Central Government grew by 15.1 per cent in 2018-19 leading to increase in share of capital expenditure in total expenditure. Given the macroeconomic situation and the structural reforms being undertaken by the government, the economy is projected to grow at 7 per cent in 2019-20.

Brief Introduction of CSO and NSSO 

CSO in the Ministry of Statistics and Programme Implementation (MoSPI) is responsible for  preparation of national accounts, compiles and publishes industrial statistics and conducts economic census and survey.. At the State level, State Directorates of Economics and Statistics are responsible for compiling State Domestic Product and other aggregates.

CSO also release quarterly GDP estimates. The CSO also revises the base year of NAS series periodically. At present it is 2011-12 for the Indian economy as revised in 2015

Set up in 1949, it is one of the two wings of National Statistical Organisation along with NSSO responsible for coordination of statistical activities and for maintaining statistical standards. Its activities include:

NSSO (National Sample Survey Organisation) was set up in the year 1950. It basically deals with    compilation of national accounts, Conduct of annual surveys of industry, Economic census, Compilation of Index of Industrial Production (IIP), Compilation of Consumer Price Index (CPI) , Social statics (health, education etc), Industrial Classifications , International Comparisons, utilization of Public Distribution System, Employment/ Unemployment statistics.

Restructuring of Ministry of Statistics &Programme Implementation (MoSPI)

The National Statistical Commission, under the Chairpersonship of Dr. C. Rangarajan, had, inter-alia, recommended for the creation of National Statistical Office (NSO) to be headed by a National Statistician, with appropriate autonomy and independence for producing Official Statistics as is prevalent in other countries. The Government, while accepting the recommendations, had approved the establishment of NSO to be headed by Chief Statistician of India by merging the then Central Statistical Organisation (CSO) and National Sample Survey Organisation (NSSO) to form the NSOin May, 2005. The NSO was in existence since then to serve as the executive wing of the Government in the field of statistics, andthe Chief Statistician of India (CSI) & Secretary was itssole functionary. In the restructuring exercise, the administrative, coordination and planning activities of MoSPIhave also been brought into NSO, which continues to be headed by CSI & Secretary, for providing requisiteadministrative support to the statistical activities ofMoSPI.

In 2018, the Cabinet had approved several new activities including the conduct of new surveys on the Annual Survey of Services Sector (for a more elaborate coverage of the services sector), Annual Survey of Unincorporated Enterprises (to get a better understanding of these enterprises, primarily in the informal sector), Time Use Survey (for assessing the time disposition of household members) and the Economic Census of all establishments. All these activities require significant financial and human resources which take time to become available. The immediate requirement of manpower can be addressed through a judicious mix of redeployment of existing manpower resources and outsourcing to professional manpower agencies. The outsourced field staff has also to be rigorously trained before deployment and thereafter effectively monitored. This model is being implemented in the Economic Census and other NSS Surveys. In the last Economic Census conducted in 2013, the State Governments were requested to arrange for staff to conduct the field work, which led to delays in finalising and releasing the results. In the ongoing Economic Census, 2019, MoSPI has partnered with the Common Service Centres (CSC) SPV to undertake the field work, and the officers of National Sample Survey (NSS), State Governments and line Ministries will be involved in close monitoring and supervision of the field work to ensure data quality and good coverage. This is the first time that the rigours of monitoring and supervision of field work exercised in NSS will be leveraged for the Economic Census so that results of better quality would be available for creation of a National Statistical Business Register. This process has been catalysed by the establishment of a unified National Statistical Office (NSO).

The internal restructuring of MoSPI is to strengthen the national statistical system while maintaining its autonomy. The various divisions in MoSPI continue to perform their functions as before. Further, the role and status of National Statistical Commission (NSC) remains unaltered and it continues to have the overall responsibility for providing strategic direction and leadership to the national statistical system in MoSPI, line Ministries and State Governments.

Domestic Product

Besides production of goods in agriculture and industry, modern economy also provides for the production of services, like transport, storage of goods, banking insurance and so on.  What the economy produces then is the aggregate of goods and services produced by the individual producers and enterprises in the economy. This aggregate is called the Domestic Product of the economy. 

Economists actually use two concepts in this connection: the Gross Domestic Product (GDP) and the Net Domestic Product (NDP).

Gross Domestic Product is the sum of monetary values of all final goods and services produced in a year without making and deduction for the ‘wear and tear’ of the land, buildings and machinery used in production.  Such wear and tear is also reffered to as depreciation. When this deduction is made, what we get is the net domestic product or NDP.

NDP = GDP – Depreciation

Meaning of “Final”:  But when making the total one must remember not to count for a second time the value of one type of goods that has been used to produce another type of goods.  For example, when we have to count the value of a loaf we must deduct from it the value of the flour that has gone into it because that has already been counted once.  In other worlds, we count the value of final goods (like a loaf) only after deducting the values of all the intermediate goods (like flour) that have gone into its production.

National Product

Gross National Product or GNP:  It may be interesting to note that the people living in the economy may have earnings or remittances from (or send remittance to) other countries (through trade, for example). When we add the net earnings from abroad (i.e. remittances brought in minus remittances sent out) to the GDP we call it the Gross National Product or GNP.  When we add such net earnings to the NDP we call it the Net National Product or NNP.

GNP = GDP + Net factor Income Earning From Abroad.

NNP = GDP + Net factor Income Earning From Abroad – Depreciation. 

NNP at factor cost[4]is also called the National Income of the country.  This is because the value of the NNP is nothing but the total of what people will get as profits, wages, interest and rent, i.e. as income while producing the NNP. 

According to Simon Kuznets, national income of a country is calculated by following mentioned three methods: -

• Product Method:  S. Kuznets gave a new name of the method, i.e., product service method.  In this method net value of final goods and services produced in a country during a year is obtained and the total obtained value is called total final product.  This represents Gross Domestic Product (GDP).  Net income earned in foreign boundaries by nationals is added and depreciation is subtracted from GDP.
• Income Method:  In this method, a total of net incomes earned by working people in different sectors and commercial enterprises is obtained.  According to Dr. Bowley and Robertson, incomes of both categories of people – paying taxes and not paying taxes are added to obtain national income.  For adopting this method, sometime a group of people from various income groups is selected and on the basis of their income national income of the country is estimated.  In a broad sense, by income method “national income” is obtained by adding receipts as total rent, total wages, total interest and total profit.

Symbolically:

National Income = Total Rent + Total Wages + Total Interest + Total Profit.

• Consumption Method: It is also called expenditure method. Income is either spent on consumption or saved. Hence national income is the addition of total consumption and total savings.  For using this method, we need data related to income and savings of the consumers.  Generally reliable data of saving and consumption are not easily available.  Therefore, expenditure method is generally not used for estimating national income.

In India a combination of production method and income method is used for estimating national income.

Difficulties in Measuring National Income

There are many difficulties in measuring national income of a country accurately. The difficulties involved in national income accounting are both conceptual and statistical in nature. Some of these difficulties involved in the measurement of national income are discussed below:

Non Monetary Transactions

The first problem in National Income accounting relates to the treatment of non-monetary transactions such as the services of housewives to the members of the families. For example, if a man employees a maid servant for household work, payment to her will appear as a positive item in the national income. But, if the man were to marry to the maid servant, she would perform the same job as before but without any extra payments. In this case, the national income will decrease as her services performed remains the same as before.

Problem OfDouble Counting

It is very difficult to distinguish between final goods and intermediate goods and services. The difference between final goods and services and intermediate goods and services depends on the use of those goods and services so there are possibilities of double counting.

The Underground Economy

The underground economy consists of illegal and uncleared transactions where the goods and services are themselves illegal such as drugs, gambling, smuggling, and prostitution. Since, these incomes are not included in the national income, the national income seems to be less than the actual amount as they are not included in the accounting.

Petty Production

There are large numbers of petty producers and it is difficult to include their production in national income because they do not maintain any account.

Public Services

Another problem is whether the public services like general administration, police, army services, should be included in national income or not. It is very difficult to evaluate such services.

Transfer Payments

Individual get pension, unemployment allowance and interest on public loans, but these payments creates difficulty in the measurement of national income. These earnings are a part of individual income and they are also a part of government expenditures, but these are not included in GDP calculations as these don’t lead to any production

Capital Gains OrLoss

When the market prices of capital assets change the owners make capital gains or loss such gains or losses are not included in the national income because these changes result from revaluation and sale of existing assets rather current production.

Wages AndSalaries Paid In Kind

Additional payments made in kind may not be included in national income. But, the facilities given in kind are calculated as the supplements of wages and salaries on the income side.

Besides These, The Following Points Are Also Represents The Difficulties In National Income Accounting:

• Second hand transactions;
• Environment damages;
• Calculation of depreciation;
• Inadequate and unreliable statistics; etc.

Personal Income

Derived from national income figures, personal income is the amount of money received by individuals for their own use.  It is made up of all types of income: wages and salaries, proprietor and rental income, dividends and personal interest, and transfer payments. The latter comprises income from pensions, social insurance, and social-service payments.  In recent years transfer payments have become a more important segment of personal income.

Personal income (PI) =NI – undistributed profits – net interest payments made by households – corporate tax - social security contributions like PF made by individuals/households + transfer payments to the households from the government and firms.

When total taxes are subtracted from personal income, the remainder is called disposable income, which is either spent or saved.  Through the measurement of these income figures, the government determines how much money is available as income and how it is distributed.

GDP Deflator

The Gross Domestic Product (GDP) deflator is a measure of general price inflation. It is calculated by dividing nominal GDP by real GDP and then multiplying by 100. Nominal GDP is the market value of goods and services produced in an economy, unadjusted for inflation (It is the GDP measured at current prices). Real GDP is nominal GDP, adjusted for inflation to reflect changes in real output (It is the GDP measured at constant prices).

Calculation OfNational Income On Purchasing Power Parity Basis:

Purchasing power parity conversion factor ( or correction factor) is the number of units of a country's currency required to buy the same amount of goods and services in the domestic market as a U.S. dollar would buy in the United States. The ratio of PPP conversion factor to market exchange rate is the result obtained by dividing the PPP conversion factor by the market exchange rate. The ratio, also referred to as the national price level, makes it possible to compare the cost of the bundle of goods that make up gross domestic product (GDP) across countries.

As per latest World Bank data for 2014-15, the PPP conversion factor for India is 0.3 i.e. to buy the equivalent amount of goods and services that cost one dollar in US market; one needs 0.3 dollar in India.

This figure rises as a country develops and its domestic prices catch up with international prices and the exchange rate rises.

By the time a country becomes developed, the PPP correction factor has to be smaller. This happens as the prices in formerly poor countries catches with prices of industrialized nations and as a result of exchange rate changes also.

Savings

To accelerate the process of growth in an economy, a country has to boost its level of investment. This investment can be financed from internal savings as well as external borrowings. In India Domestic savings generally come from the following three sectors:

Household sector

The savings of the household sector are broadly classified into financial savings and savings in the form of physical assets. Financial savings are in the form of currency and deposits shares and debentures, net claims on the government, life insurance funds, Unit Trust of India and provident and pension funds. Savings in physical assets are in the form of investment in real estate, ornaments, jewellery etc.

Private corporate sector

The savings of the private corporate sector are derived from

1.         Non-government corporate sector and

2.         Corporate banks and co-operative societies.

Public sector

The savings of the public sector are derived from

1.   Government administration and departmental enterprises and

2.   Government companies and statutory corporations.

Though the saving rate in India has risen considerably during the five decades of economic planning, it is beyond doubt that it still remains far below the warranted rate of savings. There are many reasons behind this under-achievement of saving rate

Household sector leads in Gross Domestic Savings followed by Private Sector/ Corporate Sector and Public Sector.

Savings Recent Trends

Despite the fact that Indian economy has registered a fairly robust growth in the 4 years between 2014-15 and 2017-18, story on savings and investment in the economy has not been so heartening. The investment rate (Gross Capital Formation (GCF) as a share of GDP) in the economy declined by nearly 5.6 percentage points between 2011-12 and 2015-16. As can be seen, the major reduction occurred in the year 2013-14, when investment rate declined by nearly 5 percentage points. This was on account of number of factors viz. difficulties in acquiring land, delayed and cumbersome environmental clearances, problems on infrastructure front, etc. Although many of these problems have been addressed, resulting in improved power situation, lessening of infrastructure bottlenecks, etc., the investment rate (mainly fixed investment) has not picked up. Savings rate (Gross saving as a share of GDP) also declined by two and half percentage points between 2011-12 and 2013- 14 and has remained rangebound thereafter. The faster decline in investment rate vis-à-vis the savings rate has led to lower level of current account deficit (Savings Investment gap) from 2013-14 to 2015-16.

Savings in an economy originate from households, private corporate sector and public sector (including general government). In line with overall savings of the economy, the savings of household sector as a ratio of GDP have declined from 23.6 per cent in 2011-12 to 19.2 per cent in 2015-16, while that of private corporate sector have increased. With the general government savings showing an improvement, (although it continued to be in negative territory), the reduction in the public savings up to 2014-15 can be ascribed to lower level of savings of public sector undertakings.

Household sector accounts for the bulk of the savings. However, the share of household savings in total savings declined from around 68 per cent in 2011-12 to 59 per cent in 2015-16. Within the households’ savings, there has been a substitution away from physical to financial assets, with the share of former declining by over 10 percentage points. Public savings that declined from 1.5 per cent of GDP in 2011-12 to 0.9 per cent in 2014-15, however, increased again in 2015-16. This could be partly explained by higher collection of union excise duties, particularly from petroleum products and reduced level of petroleum subsidy bill of the central government. The share of private corporate sector in the total savings increased from 9.5 per cent of GDP in 2011-12 to about 12 per cent of GDP in 2015-16.

The data for gross savings is not available beyond 2015-16. However, preliminary information for financial savings of the household sector is available from RBI till 2016-17. Financial savings by the households are held mainly in currency, bank deposits, life insurance funds, provident and pension funds and of late in the form of shares and debentures. Bank deposits accounted for about 50 per cent of the aggregate financial savings between 2011-12 and 2015-16. There was a significant decline in the proportion of deployment of financial savings in bank deposits and life insurance funds and an increase in share of currency, provident and pension funds, claims on government (primarily in small savings) in 2015-16. Savings held in shares and debentures more than doubled, and within this category, mutual funds segment increased by 126 per cent in 2015-16 over the previous year.

The pattern of household’s financial savings was significantly different in 2016-17 vis-à-vis the preceding 5 years. While the overall financial savings of the households registered an increase of over 20 per cent in 2016-17, (significantly higher than the growth witnessed in any of the preceding 5 years), there was a decline in the savings in the form of currency by over 250 per cent (of about Rs. 5 lakh crore). This decline primarily owed to the withdrawal of high denomination currency notes in November 2016 and partial remonetisation by end March 2017. The savings channeled into bank deposits, life insurance funds and shares and debentures increased by 82 per cent, 66 per cent and 345 per cent respectively in 2016-17. Within the shares and debentures category, the growth of savings in mutual funds registered a phenomenal increase of more than 400 per cent over and above the growth of 126 per cent witnessed in 2015-16. Thus within a span of 2 years, savings in the form of mutual funds registered more than 11-fold increase. That this happened in a period when the BSE Sensex increased by an average of just about 1.5 per cent per annum needs to be analyzed in more detail.

Small Savings

Small savings instruments are Post Office Monthly Income Schemes and Time Deposits; National Savings Scheme; Indira Vikas Patra; Kisan Vikas Patra; Public Provident Fund and so on. They are aimed at promoting safe and long-term savings by individuals. They are initiated by the central Government but mobilized by the State Governments; and are deposited with and managed by the central government. As a reward State Governments receive all such savings as loan.

Small savings are a sizeable portion of the financial savings of the country. They contribute to the finances of the Government- federal and State- that is, they are an important source of borrowing for the government. These schemes have a built in tax concession that enhances their attraction for the small savers. They also earn a rate of interest that is higher in comparison to what the banks offer- approximately 8%. They are called small savings as savings are made in small amounts by low income and other groups. Small savings instruments in India are retailed through 1.53 lakh post offices .

The National Small Savings Fund (NSSF), in the Public Account of India has all the small savings. They are completely on lent to the state in which they are collected.

CAPITAL FORMATION

All those material inputs which are used to produce goods and services for sale in the market are a part of capital goods. Stocks of raw material, semi-finished and finished goods lying with the producers at the end of an accounting year are also a part of capital goods. Capital goods are defined as all goods produced for use in future productive processes. Some more examples of capital goods are machinery, equipment, roads and bridges. All these examples refer to real capital.

Capital Formation is the most important factor in determination of the rate of growth of a country. The greater the capital-formation the more there is the development. In an underdeveloped economy low capital formation is considered as one of the major hurdle in the way of rapid economic growth. The meaning of “capital formation” is that society does not apply the whole of its current productive activity to the needs and desires of immediate consumption, but directs a part of it to the making of capital goods, tools and instruments, machines and transport facilities, plants and equipments-the various forms of real capital that can so greatly increase the efficacy of productive effort. This definition emphasises the inclusion of real physical assets and not financial assets such as bonds, shares, currency notes etc. Human capital formation too is ignored while describing the real capital formation.

There are parallels between gross domestic savings and capital formation that is quite natural.

Incremental capital output ratio (ICOR)

Another determinant of economic growth is the Incremental capital-output ratio. The term ‘capital-output ratio’ refers to the number of units of capital that are required in order to produce one unit of output. In other words, capital-output ratio reflects the productivity of capital in the various sectors of the economy at a point of time. The capital –output ratio for the economy as a whole is only a shorthand description of the productivity of capital.

This can be estimated by dividing the investment or increase in the capital stock of a firm, industry or an economy over a period, with the increase in output over that period. in other words, it is the addition to the capital stock in, say a year, when related to addition to output in the year.

It has been observed that the Indian economy, since the beginning of planning era, has become increasingly capital-intensive. This means that over the years, for a rupee worth of additional output, the capital deployed has been on the rise.

ICOR for India stands close to 5 whereas for developed economies like USA , it is around 3.5 to 4.