India’s GDP composition
- March 28, 2022
- Posted by: OptimizeIAS Team
- Category: DPN Topics
India’s GDP composition
Section: National Income
The Indian economy can grow consistently at 8 per cent for the next 20 years leading to the generation of up to 1.5 crore new jobs and bringing out 3.5 crore people out of poverty every year on the basis of the capital investment strategy of the government.
Share of sectors in nominal GVA(%)
Demand side trends
(Those components affecting the aggregate demand side of the economy i.e. total consumption including private and government consumption, total investment, net export i.e. export minus import)
Share of Sectors in Nominal GDP (per cent)
There have been full recoveries of all components on the demand side in 2021-22 except for private consumption
- Total Consumption– It is expected to grow by 7.0 % in 2021-22 with government consumption biggest contributor, surpassing the pre pandemic projected to grow at 7.6%.
- Gross Fixed Capital Formation– it is expected to grow at 15% in 2021-22, with investment to GDP ratio 29.6% (highest in seven years)
- Crowd in effect of government’s capex in infrastructure (rise in infrastructural growth will create a favourable conditions for rise in business optimism by increasing stock of social overhead capital and ease of doing business, thus it will lead to increase in private investment)
- Rise in companies profit and stock market
- Decline in Non Performing Assets of banks and rise in Capital Adequacy Ratio
- Net export– India’s total export is projected to grow at 16.5% and import grow at 29.4% in 2021-22 (both higher than pre pandemic level), though manageable current account deficit owing to:
- India’s merchandise imports jumped to a record $589 billion owing to the rising oil prices, while exports till March 21 stood at $400.8 billion. Thus, meeting the export target of 2021-22 in seven days’ advance.
- Robust increase in capital inflows sufficient to finance the modest current account deficit and led to rise in foreign exchange a record high of US$ 634 billion).This is equivalent to 13.2 months of imports and higher than the country’s external debt.
|Aggregate demand is a measurement of the total amount of demand for all finished goods and services produced in an economy. Aggregate demand is expressed as the total amount of money exchanged for those goods and services at a specific price level and point in time.
The equation for aggregate demand adds the amount of consumer spending, private investment, government spending, and the net of exports and imports. The formula is shown as follows:
Aggregate demand over the long term equals gross domestic product (GDP) because the two metrics are calculated in the same way. GDP represents the total amount of goods and services produced in an economy while aggregate demand is the demand or desire for those goods. As a result of the same calculation methods, the aggregate demand and GDP increase or decrease together.
The decline in natural gas supply is an example of supply chain disruption and will have no impact on aggregate demand.
Gross fixed capital formation (GFCF) is the gross addition to fixed assets like machinery and equipment, intangible assets and indicates the state of investments in the economy. GFCF is a component of the expenditure on gross domestic product (GDP), and thus shows something about how much of the new value added in the economy is invested rather than consumed.
GFCF is called “gross” because the measure does not make any adjustments to deduct the consumption of fixed capital (depreciation of fixed assets) from the investment figures. For the analysis of the development of the productive capital stock, it is important to measure the value of the acquisitions less disposals of fixed assets beyond replacement for obsolescence of existing assets due to normal wear and tear.
“Net fixed investment” excludes the depreciation of existing assets from the figures for new fixed investment, and is called net fixed capital formation.
GFCF is not a measure of total investment, because only the value of net additions to fixed assets is measured, and all kinds of financial assets are excluded, as well as stocks of inventories and other operating costs (the latter included in intermediate consumption).
Real v/s Nominal GDP
The nominal GDP is the value of all the final goods and services that an economy produced during a given year. It is calculated by using the prices that are current in the year in which the output is produced. In economics, a nominal value is expressed in monetary terms.
For example, a nominal value can change due to shifts in quantity and price. The nominal GDP takes into account all of the changes that occurred for all goods and services produced during a given year. If prices change from one period to the next and the output does not change, the nominal GDP would change even though the output remained constant. It is also called GDP at current prices.
The real GDP is the total value of all of the final goods and services that an economy produces during a given year, accounting for inflation and deflation. It is calculated using the prices of a selected base year. To calculate Real GDP, you must determine how much GDP has been changed by inflation since the base year, and divide out the inflation each year. Real GDP, therefore, accounts for the fact that if prices change but output doesn’t, nominal GDP would change.
In economics, real value is not influenced by changes in price, it is only impacted by changes in quantity. Real values measure the purchasing power net of any price changes over time. The real GDP determines the purchasing power net of price changes for a given year. Real GDP accounts for inflation and deflation. It transforms the money-value measure, nominal GDP, into an index for the quantity of total output. It is also called GDP at constant price
Real GDP= Nominal GDP/Price level in base year *100