Gross Domestic Product

GDP is an abbreviation for Gross Domestic Product, which is the total value of all
goods, services, agricultural produce and minerals extracted in a country or area, usually in
one year. The concept applies to countries, for example India, and also to 'trading blocs' like
the EU and NAFTA. Often the GDP divided by the population is used as a measure of
relative prosperity.

GDP = C + I + G + (X-Im)

C = Consumption Expenditure

I = Investment

G = Government Expenditure

X = Export

Im = Import

Here is a description of each GDP component:

Consumption:

C (consumption) is normally the largest GDP component in the economy, consisting

of private (household final consumption expenditure) in the economy. These personal
expenditures fall under one of the following categories: durable goods, non-durable goods,
and services. Examples include food, rent, jewelry, gasoline, and medical expenses but do not
include the purchase of new housing.

Investment:

I (investment) include business investment in equipment for example and do not

include exchanges of existing assets. Examples include construction of a new mine, purchase
of software, or purchase of machinery and equipment for a factory. Spending by households
(not government) on new houses is also included in Investment.
 In contrast to its colloquial meaning, 'Investment' in GDP does not mean purchases of
financial products. Buying financial products is classed as 'saving', as opposed to investment.
This avoids double-counting: if one buys shares in a company, and the company uses the
money received to buy plant, equipment, etc., the amount will be counted toward GDP when
the company spends the money on those things; to also count it when one gives it to the
company would be to count two times an amount that only corresponds to one group of
products. Buying bonds or stocks is a swapping of deeds, a transfer of claims on future
production, not directly an expenditure on products.

Government Expenditure:

G (government spending) is the sum of government expenditures on final goods and

services. It includes salaries of public servants, purchase of weapons for the military, and any
investment expenditure by a government. It does not include any transfer payments, such as
social security or unemployment benefits.

Export:

X (exports) represents gross exports. GDP captures the amount a country produces,
including goods and services produced for other nations' consumption, therefore exports are
added.

Import:

M (imports) represents gross imports. Imports are subtracted since imported goods
will be included in the terms G, I, or C, and must be deducted to avoid counting foreign
supply as domestic.

A fully equivalent definition is that GDP (Y) is the sum of final consumption
expenditure (FCE), gross capital formation (GCF), and net exports (X - M).

Y = FCE + GCF+ (X − M)
 India’s GDP
The revised estimates of India's GDP for 2009-10 have been interesting in many
regards. The GDP growth at 7.4 percent is higher than 6.7 percent in the previous year
indicating that the economy is surely on a recovery path. In a year of the worst drought since
1972, the growth in agriculture turned out to be positive. Industry has led the recovery with
both manufacturing and mining showing equally high growth rates. This sector has shown
rising quarterly growth rates while agriculture and services have not shown such a secular
trend. The strong growth is driven from the demand side, predominantly by investment;
consumption remains subdued. The external sector did contribute to growth through a larger
decline in imports as compared to exports. All these features of GDP growth in the last year
will have implications for the growth rate for the current year.

Table 1: India's GDP Growth, 2009-10

2008-09 2009-10 Q1 09-10 Q2 09-10 Q3 09-10 Q4 09-10

Agriculture 1.6 0.2 1.9 0.9 -1.8 0.7

Industry 3.9 9.3 4.6 7.8 11.1 13.3
Manufacturing 3.2 10.8 3.8 9.1 13.8 16.3
Mining & quarrying 1.6 10.6 8.2 10.1 9.6 14.0
Services 9.8 8.5 7.9 10.7 7.2 8.4
Total GDP 6.7 7.4 6.0 8.6 6.5 8.6
Non-agricultural GDP 7.7 8.8 6.8 9.7 8.4 10.0
Demand Composition:
Private consumption 6.8 4.3 2.9 6.4 5.3 2.6
Government consumption 16.7 10.5 15.3 30.5 2.5 2.1
Fixed Investment 4.0 7.2 -0.7 1.6 8.8 17.7
Change in stocks -61.2 5.9 -0.9 4.2 8.7 11.1
Exports of goods & services 19.3 -6.7 -16.0 -15.8 -7.5 14.2
Imports of goods & services 23.0 -7.3 -8.5 -10.5 -5.8 -3.7
Source: Central Statistical Organization.

Agriculture:
 An important question is why extremely poor monsoon did not lead to a decline in
agricultural output last year. The rain deficit had been higher at 23 percent than the deficit of
19 per cent in the previous drought year of 2002-03. In 2002-03, agricultural output declined
by 7.2 percent; in 2009-10, it grew by 0.2 percent.

One obvious reason for this difference is that the spatial and temporal distribution of
monsoon was more favorable in 2009-10 than in 2002-03. Another reason is that the crop
production (food and cash crops) now constitutes lea than half (about 45 percent) of total
agricultural output (including forestry and fishing) and the non-crop output (fruits and
vegetables, livestock, forestry and fishing) is much less affected by drought. Yet another
important factor is that the drought last year occurred immediately after a subpar crop in the
previous year and hence the rate of decline is bound to be lower due to a lower base. This is a
contrast to the previous monsoon shock of 2002-03, which had come after the bumper crop of
2001-02.

Industry:

Industry recorded a high growth of 9.3 percent in 2009-10 against a growth of 3.9
percent in 2008-09. This is due to high growth rates in both manufacturing (10.8 percent) and
mining (10.6 percent) sectors. However, the growth rates in services showed a decline from
9.8 percent in 2008-09 to 8.5 percent, mainly because of the sharp decline in the growth of
the component of community, social and personal services from 13.9 percent in 2008-09 to
5.6 percent in 2009-10. This reflects the petering out of the effects of fiscal stimulus.

Manufacturing growth showed consistently rising growth rates quarter after quarter
from the second quarter of 2009-10, 9.1 percent in Q2 to 16.3 percent in Q4. The growth
rates in mining sector had been exceptionally high during 2009-10 due to the coming on
stream of gas production from the new Kaveri basin and crude oil production from the
Barmer fields in Rajasthan.
 Investment:

Table 2 calculates the contribution to GDP growth from the demand side. The growth
in 2008-09 is contributed mostly by consumption demand, from both the private sector and
the government. The huge inventory destocking and negative net exports could explain the
low growth during 2008-09.

Table 2: Contribution to GDP Growth by Demand Components

2008-09 2009-10
Private consumption 4.0 2.6
Government consumption 1.7 1.2

Fixed Investment 1.3 2.4

Change in stocks -2.2 0.1

Valuables 0.3 0.1
Net exports -1.8 0.6
Discrepancies 1.8 0.7
GDP at market prices 5.1 7.7
Source: Constructed from CSO data.

In 2009-10, consumption demand, private and government, contributed less than half
the growth in GDP. A third was contributed by investment, including stock accumulation and
valuables. Net exports also contributed positively to growth. However, it may be noted that
the contribution from net exports did not come through a large export growth but from a large
import decline.

Growth prospects in 2010-11:

 What are the growth prospects for 2010-11? The monsoon has arrived on time and if
its progress is normal, as predicted by the meteorology department, we could expect a
reasonably high growth of five to six percent in the agricultural sector for the current year.
After a steep bounce back, the pace of industrial growth is likely to slow from a 9.3 percent
of last year to a 7-8 percent rate in the current year for three reasons. First, the mining and
quarrying sector may not repeat the sharp jump in growth last year. Second, government
consumption growth will further come down with the fiscal consolidation in place. Third, net
exports are likely to revert to the territory with imports rising faster than exports.

The investment resurgence we see from the second half last financial year needs to be
nurtured carefully for its sustenance. Continuing high inflation and last year’s poor
agricultural performance are keeping consumption demand low – both needs to be reversed.
Infrastructure investment is pushing overall investment high in the economy now but that
may be sustained unless private consumption demand recovers.