Government considering fewer GDP estimates to avoid confusing markets

Government considering fewer GDP estimates to avoid confusing markets

Subject: Economy

Section: National Income

Key Points:

• Government is weighing a proposal to cut official annual gross domestic product estimates to four releases from six to avoid multiple revisions
• Multiple estimates make them confusing for market participants.
• Impact of the change:
  • The time for finalizing national income estimates should reduce to two years from nearly three years at present.
  • Will allow the Statistics Ministry to incorporate more data in its estimates, enabling better policymaking, particularity for budget on February 1 and avoiding major deviations in revisions

GDP: The GDP measures the monetary value of all “final” goods and services—that is, those that are bought by the final user—produced in a country in a given period of time (say a quarter or a year).

Sub-components of GDP:

Knowledge about them helps us understand how sustainable India’s economic recovery is. Broadly speaking, GDP has four engines of growth in any economy. 

• Private Final Consumption Expenditure- PFCE.: Private Final Consumption Expenditure (PFCE) or the money spent by people on goods and services for personal consumption; this is the biggest contributor of GDP, accounting for almost 55%-60%
• Gross Fixed Capital Formation or GFCF: Government Final Consumption Expenditure (GFCE) or the money spent by governments towards its daily needs; this accounts for 10% of GDP.
• Government Final Consumption Expenditure (GFCE): Gross Fixed Capital Formation (GFCF) or the money spent by private firms and governments towards building productive capacities (investments);this is accounts for 30%-32% of GDP
• Net Exports- (Export-Import) i.e. NX Net of exports and imports; this is typically negative impulse to GDP because imports are more than exports, implying money going out of the country

India’s context: – share of components in total GDP:

Private Final Consumption Expenditure (56%)>Gross Fixed Capital Formation (32%) > Government Final Consumption Expenditure (11%)>Net export. NX is the smallest engine of GDP growth and is often negative.

Alternatives-

Often, overall GDP does not tell us the full picture. To get a better understanding of how an average Indian is affected the GDP datasheet also looks at per capita income (or p.c. GDP) and per capita expenditure or per capita PFCE.

• Per capita income is a measure of the amount of money earned per person in a nation or geographic region. Per capita income can be used to determine the average per-person income for an area and to evaluate the standard of living and quality of life of the population. Per capita income for a nation is calculated by dividing the country’s national income by its population.
• Per capita expenditures refers to the market value( price at which they are sold in the market) of all goods purchased by households divided by population of the country. Durable goods like tv, computer, washing machine, AC. Purchase of properties or capital goods is not included but rent paid for rented houses is included and money paid for services is also included.

GDP and GVA:

For any financial year, the two main variables of national income are GDP and GVA (or Gross Value Added):

The GDP calculates India’s national income by adding up all the expenditures in the economy while,

The GVA calculates the national income from the supply side by looking at the value-added in each sector of the economy. GVA sub-components:

• Agriculture, forestry and fishing
• Mining and quarrying
• Manufacturing
• Electricity, gas, water supply and other utility services
• Construction
• Trade, hotel, transport, communication and services related to Broadcasting
• Financial, real estate and professional services
• Public administration, defence and other services.

While both the variables measure national income, they are linked as follows:

GDP = (GVA) + (Taxes earned by the government) — (Subsidies provided by the government).

• As such, if the government earned more from taxes than what it spent on subsidies, GDP will be higher than GVA.
• If, on the other hand, the government provided subsidies in excess of its tax revenues, the absolute level of GVA would be higher than the absolute level of GDP.