Budget

Taxation
14th FC
GST

GDP
GDP: Theory and Current

Formulas

Calculation
Methods

CSO
modification

Survey Data
 GDP Definition

Market value

All final goods & services

Produced within country

For a given time period.

 Gross
Domestic ++
Product

++

NA
Tata’s dividend
from UK
 GDP vs Inflation

1.Current price
2.Constant price
3.GDP deflator
Base year: 2011 Present year: 2015
Constant Price Current Price
Rs.1 Lakh / car Rs.1.5 Lakh / car

GDP: 3 lakh Nominal GDP: 3 lakh

Base year: 2011 Present year: 2015
Constant Price Adjust with Base year (Constant) Price
Rs.1 Lakh / car Rs.1.5 lakh 1 Lakh / car

Nominal GDP: 3 lakh

GDP: 3 lakh Real GDP: 2 lakh
 Present year: 2015
Base year (constant) Price
Rs.1 Lakh / car

Nominal GDP: 3 lakh

GDP
Deflator 100
Real GDP: 2 lakh

GDP Deflator=150
 Gross
National ++
Product

MINUS

GNP = GDP + Net Income

from abroad ++
Tata’s dividend
from UK
Real vs Nominal GDP, GDP deflator
GDP vs. GNP
NEXT: Factor Cost vs Market Price
Labor Wage(W) + Taxes: 20k
Land Rent(R)
Capital Interest(I) - Subsidies: 5k
Entrepreneurship Profit(P)
Factor Cost Rs.1 Lakh Market Price: 1.15 L
 (+) GDP
@Factor Cost

GDP
Market (+) Taxes
Price

(-) Subsidies
GNP = GDP + Net Income
from abroad
 Gross NET
National National
Product Product
(Market
(-) Depreciation Price)

NNP -TAX NNP(FC)

(MP) +Subsidies =National
income
 (+) GDP
@Factor Cost

GDP
Market (+) Taxes
Price

(-) Subsidies
 (+) NNP
@Factor Cost

NNP
Market (+) Taxes
Price

(-) Subsidies
 What is Net National Income? (1997)
A. Net Domestic Product at market
price
B. Net Domestic Product at factor
cost
C. NNP at market price
D. NNP at factor cost (right, NCERT
Class12, Macro, Page24)
1. Skip 2. Attempt 3. Mark n Review
Per capita National Income (Current Market Price)

2014 88533

2013 80388

2012 71593

2011 64316
GNP Depreciation NNP (MP)

Current
Transfer

National
Disposable
income
 Self Study
Class 12 macro-economics
Chapter 2 NCERT
+ glossary / appendix
 So far

Formulas

Calculation
Methods

CSO
modification

Survey Data
 Income

GDP
Calculation Expenditure
3 methods
Production
(GVA)
Method #1: Income
 Factor Income
Labor Wages
Capital Interest
Entrepreneur Profit
Land/Building Rent

Total= GDP @Factor Cost

 GDP Constant
@ market prices

Inflation adjust

GDP @Current
Market Price
Income Method (WIPR)
• W+I+P+R = GDP @Factor Cost.
• Wages, interest, profit, rent

Expenditure

Production: Gross Value Added (GVA)

Consumption Private

Investment

Government

Foreign Expenditure
 Expenditure
1. Not in “intermediate goods”
2. Steel, Rubber….no Private final
3. Final Car…..yes
4. Existing house…yes (calculated
as owner paying “rent” to himself)
5. New house purchase….NO
1. New house purchase yes. Expenditure
2. “purchase” of goods used in future
production Investment
3. Leftover Inventory….yes [Rubber
steel, car]
4. Capital goods….Yes
5. Heavy Machinery….Yes
6. Building, Structure….Yes
7. Share, Bond, Debenture….its
“Expenditure” utilized above things
Consumption Private

Investment

Government

Foreign Expenditure
 Expenditure
1. Salary to employees….Yes
2. FCI grain purchase = yes Government
Purchase
3. Food coupon, LPG-DBT = no. That
money gets counted in “Private
consumption”.
4. Transfer Payments…..No [DBT,
Pension, Scholarship, food
coupons etc.]
Consumption Private

Investment

Government

Foreign Expenditure
 GDP bottom line: “Domestically Produced”

Money earned
from “EXPORT”
(+++)

“Domestically
produced car”
 “Domestically” produced goods/services

Foreign car import

Not our “Domestically” Private “Final”

produced car Expenditure
(+++)
Therefore “Import”
(- - - MINUS)
GDP= C + I + G + (X – M)
+Consumption (Final)

+Investment

+Government “Purchase”

Foreign Expenditure
(Export-Import)
GDP Calculation: THREE Methods
Income Method (WIPR0)
• W+I+P+R
• Wages, interest, profit, rent

Expenditure
• C + I + G + (X – M)
• Consumption, investment, Govt. purchase, Net export

Production: Gross Value Added (GVA)

Intermediate
00 Rs.1 Lakh Rs.5 Lakh
Goods
Labor Wage(W) Wage(W) Wage(W)
Capital Interest(I) Interest(I) Interest(I)
Entrep. Profit(P) Profit(P) Profit(P)
Land Rent(R) Rent(R) Rent(R)
5 Lakh 10 Lakh GDP
Value Added Rs.1 Lakh 4 Lakh 5 Lakh 10 lakh
 16
SALE Value Rs.1 Lakh 5 Lakh 10 Lakh
Lakh
Cost
Intermed. 00 1 lakh 5 lakh 6 lakh
Goods
GDP Gross 16-6
Factor Cost Value Added =10 lakh
GDP @FACTOR COST

GDP Market Price (MP)

GDP Calculation: THREE Methods
Income Method (WIPR0)
• W+I+P+R
• Wages, interest, profit, rent

Expenditure
• C + I + G + (X – M)
• Consumption, investment, Govt. purchase, Net export

Production: Gross Value Added (GVA)

• Total Value of Sale – Cost of intermediate goods
 GDP doesn’t cover following:

Underground Non-Marketed
Barter Exchanges
Economy Activities

-ve Externality Opportunity cost Income Inequality

 Gini-Coefficient
H.D.I In future Economic
survey lectures on HRD
 So far

Formulas

Calculation
Methods

CSO
modification

Survey Data
 CSO calculating since 1955
Agriculture Manufacturing Transport
Forestry Power Communication
Fishing Gas-Water Trade
Mining Banking

Secondary
Primary

Tertiary
Insurance
Computer
Public
Administration
Defense
 CSO utilizes data from following

•ASI •CBDT
Goods

Services
•IIP •CBEC
•Economic •CPI-Indexes
census
•NSSO Surveys
Until now CSO’ GDP Calculation: FACTOR COST
Income Method (WIPR0)
• W+I+P+R
• Wages, interest, profit, rent

Expenditure
• C + I + G + (X – M)
• Consumption, investment, Govt. purchase, Net export

Production: Gross Value Added (GVA)

• Total Value of Sale – Cost of intermediate goods
Intermediate
00 Rs.1 Lakh Rs.5 Lakh
Goods
Labor Wage(W) Wage(W) Wage(W)
GDP
Capital Interest(I) Interest(I) Interest(I)
Income
Entrep. Profit(P) Profit(P) Profit(P)
method
Land Rent(R) Rent(R) Rent(R)
Value Added Rs.1 Lakh 5 Lakh 10 Lakh GDP
4 Lakh Production
GDP Production
 BEFORE
Wages

Profit

Rent

Interest
BEFORE CSO-2015 Reform
Wages Compensation

Profit
Consumption of
Fixed Capital
Rent
Mixed income /
Interest Operating Surplus
 WAGES Compensation

Only salary Salaries

+ Social security contribution
by Boss (employer) to
Employee
 Profit Mixed income / OS

Only workers / laborers get Hence the concept of Mixed

wages income (MI)/ operating
Entrepreneurs get “profit” surplus (OS)
What about informal,
unorganized family owned
Agro, cottage industry? WAGE
/ PROFIT?
 Profit
Corporates – easy to
calculate profit
But unorganized firms:
difficult to separate profit
from wages due to lack of
standard accounting
Operating Surplus
Profit….yes
Mixed income or operating
surplus as and where
applicable
BEFORE CSO-2015 Reform
Wages Compensation

Profit
Consumption of
Fixed Capital
Rent
Mixed income /
Interest Operating Surplus
 CSO revised
System of National Accounts (SNA)
Collaboration among UN, World Consumption
bank, IMF, OECD and European of fixed capital
commission.
if capital asset not “used” =>
“intermediate goods”
Begin production =>“final goods”
generated. Calculate CFC
accordingly.
 Compensation

Consumption of
Fixed Capital

Mixed income /
Operating Surplus

GDP GVA at factor cost

Production Production
Taxes Subsidies

GDP GVA at Basic Price

 production Taxes Production Subsidies

1. Independent of Production Independent of production

Volume volume
2. Stamp Duty Subsidies to Railways
3. Land revenue Input subsidies to Farmers,
4. Professional Tax small industries
Administrative subsidies to
cooperatives & corporates
 Sum of
GVA @Basic Product Product
prices Taxes Subsidies

GDP at Market Price(MP)

 Product Taxes Product Subsidies

1. Per unit of Per unit of Production

production Food, Petroleum,
2. VAT, EXCISE, Fertilizer
Custom, Service Tax Interest subvention to
farmers
Subsidies for insurance
to households
 GDP at Constant MP
Official GDP of India
Adjust for inflation

Sum of
GVA @Basic Product Product
prices Taxes Subsidies

GDP at Market Price(MP)

Formulas: Official press release (30th January 2015)
 CSO-GDP
GDP @Factor cost….nope
GDP @(Constant) Market price=
India’s GDP Reforms done
Base year: 2004 => 2011
internationally valid System of
National Accounts (SNA) 2008
Classified economic activities &
their account keeping according.
 CSO-GDP
Agro census 2010 included
Livestock census 2012 included Agro
Meat yield and by-product Coverage
valuation revised
Crop and livestock activities are
segregated
 CSO-GDP
Local bodies – effective coverage
of their services
Rural
Informal sector: Latest NSSO Coverage
survey data included
“Effective Labour Input Method” to
get data from rural activities
without modern accounting system.
 CSO-GDP
Sand extraction measurement
updated
Mining/Mfg
Before: Establishment approach= Coverage
“production cost”.
After: “Enterprise approach”=
production cost + cost of selling
and marketing.
Construction sector accounting
updated.
 CSO-GDP
Before: ASI & IIP data but
“Sampling method” = not
Corporates
“complete” picture.
Coverage
After: Companies’ Mfg. and service
production from Corporate affairs
MCA21 online database.
“production data” of Financial
services (share brokers, NBFCs etc.)
with help of SEBI, PFRDA, IRDA
 CSO-GDP
Will use service tax collection
rates to find growth in health,
Services
education etc.
Coverage
Before: Earlier CPI AL, RL, IW data
used.
After: Now just CPI (Rural urban
combined)
 Criticism
1. GDP deflator= nominal / real
2. Real = Nominal / Deflator CSO revised
3. Real ∝ 1/deflator method
4. ▼ Deflator = Real GDP ▲
5. 2013: Indian economy wasn’t
“Rollicking” - Rajanbhai
 Criticism
1. 2014 rate (7.4%) : plausible, due
to reforms & investor confidence
(in Modi raj) CSO revised
method
2. 2013 rate (6.9%) : difficult to
believe. Discrepancies with other
numbers.
3. Mfg. growth doesn’t match with
ground realities.
Mfg. unbelievable

Economic
Survey
Vol1, Ch1
 Criticism
1. Bcoz, Lot Capital flown out due to
Fed Tapering.
2013 growth
2. import bill and CAD high unbelievable!
3. Domestic savings down, stalled
projects and NPAs.
4. GDP revision usually lowers the
numbers- As it happened in other
nations.
5. But India- curiously improved
 Criticism
1. Need to examine data in greater
details Economic
2. Indian Economy surging…NOPE. Survey
3. Indian Economy recovering…YES. Vol1, Ch1
4. Survey forecast for 2015: 8.1-
8.5%
 Positive
Earlier Base year 2004
But afterwards 2007-08
subprime crisis. So dramatic
changes in prices & economic
activities
Must change base year.
Negative
New base year 2011
But it wasn’t out from ‘global
meltdown’ yet.
Ideal base year should be free
from global economic
abnormalities, floods,
famines, wars etc.
 Positive Negative

Before: ASI- IIP data only But do MSME have enough IT-
“Sample method” infrastructure?
After: Corporate / Mfg. Difficult to compare with old
sector comprehensive data
coverage through MCA21
portal.
 Impact of GDP calculation method revision?
FRBM Act: Fiscal deficit (FD) as 3% of GDP
▲ GDP = FD “legal compliance” easier
4/100=4% => 3/100= 3%
4/100=4% => 4/130= ~3%
▲ Sovereign credit rating (~BBB borderline.
Just one step above “junk status”)
▲ Foreign investment
 CSO-GDP
IMF quota depends on Size of
Economy and openness of economy
India 2.1 Trillion$ Economy (2014, IMF angle
as per CSO’s new method)
+ Make in India, FDI relax, Ease of
doing biz.
India can claim bigger quota @IMF
Although quota reforms require
voting
 So far

Formulas

Calculation
Methods

CSO
modification

Survey Data
Number: @constant market prices
GDP
Year
(Crores)

2011 8832012

2012 9280803
 Growth rate
GDP
Year Growth (%)
(Crores)

2011 8832012 00

2012 9280803 5.1%

 Growth rate adjusted for Constant prices
Year GDP (Crores) Growth
2011 8832012 00
2012 9280803 5.1%
2013 9921106 6.9%
2014 10656925 7.4%
 GDP (nominal, GDP (constant,
Year inflation not adjusted, Real, inflation
current) adjusted)

2014 126,53,762 10656925

2015 141,08,945 ??

Nominal Survey predicts:

growth rate: 11.5% 8.1 to 8.5%
 Growth Rate: Base year 2004 vs 2011
6.9% 7.4%
8.0%

7.0%

6.0%

5.0%
5.1%4.7% 5.0%
4.0%

3.0%

2.0%

0.0%
1.0%

0.0%

2012 2013 2014

Base-2011 Base-2004
 Sectorial contribution (ABSOLUTE CRORES)

“Establishment” approach
Some mfg types under Enterprise approach: some “services”
“services” items now classified as “mfg. industry”
GDP Share (2011-13) Employment Share (‘11)
 GDP Share (2011-13 average)
Financial-Real Estate 19.4
Agro 18.1
Mfg 17.8
Community-Personal-services 12.7
Trade-hotels 11.4
Construction 8.8
Transport-Comm 6.6
Mining 3
Electricity, gas Water 2.3
 Employment share (2011)
Agro 48.9
Mfg 12.6
Trade-hotels 11
Construction 10.6
Community-Personal-services 8.7
Transport-Comm 4.8
Financial-Real Estate 2.3
Electricity, gas Water 0.5
Mining 0.5
Economic Survey vol2: Chapter 1, page 11
 Sector’s “own” growth rate (%) GVA

100 kg. 101 kg.

2013 2014

Agri Growth
rate: 1%
GVA growth rate (2014)
Growth rate: GVA
 So far

Formulas

Calculation
Methods

CSO
modification

Survey Data
 Budget
Taxation
14th FC
GST

NEXT TIME: individual sector-

issues, policies, reforms, budget-
2015 announcement
GDP basics
GDP three methods of calculation
Sectorial share in GDP and
Employment
NEXT TIME: