Basic Economic Indicators- GDP; Purchasing Power Parity; Growth Rate; National Debt;

Balance of Trade

Gross Domestic Product (GDP) is the value of the all final goods and services produced within
the boundary of a nation during one year period. For India, this calendar year is from 1st April to
31st March.

It is also calculated by adding national private consumption, gross investment, government

spending and trade balance (exports-minus-imports). The use of the exports-minus-imports
factor removes expenditures on imports not produced in the nation, and adds expenditures of
goods and service produced which are exported, but not sold within the country.

The terms, ‘gross’, which means ‘total’ and ‘domestic’ means all economic activities done
within the boundary of a nation/country and by its own capital; ‘product’ is used to define ‘goods
and services’ together; and ‘final’ means the stage of a product after which there is no known
chance of value addition in it.

The different uses of the concept of GDP are as given below:

(i) Per annum percentage change in it is the ‘growth rate’ of an economy. For example,
if a country has a GDP of ₹107 which is 7 rupees higher than the last year, it has a
growth rate of 7 per cent. When we use the term ‘a growing’ economy, it means that
the economy is adding up its income, i.e., in quantitative terms.
(ii) It is a ‘quantitative’ concept and its volume/size indicates the ‘internal’ strength of the
economy. But it does not say anything about the ‘qualitative’ aspects of the goods and
services produced.
(iii) This is the most commonly used data in comparative economics. The GDPs of the
member nations are ranked by the IMF at purchasing power parity (PPP). India’s
GDP is today 3rd largest in the world at PPP (after China and the USA). , While at
the prevailing exchange rate of Rupee (into the US dollars) India’s GDP is ranked 5th
largest in the world.

Purchasing power parity (PPP): It is a method of calculating the correct/real value of a

currency which may be different from the market exchange rate of the currency. Using this
method economies may be studied comparatively in a common currency.

This is a very popular method handy for the IMF and WB (introduced by them in 1990) in
studying the living standards of people in different economies. The concept of the PPP was
developed by the great European conservative economist, Gustav Cassel (1866–1944), belonging
to Sweden.

This concept works on the assumption that markets work on the law of one price, i.e., identical
goods and services (in quantity as well as quality) must have the same price in different markets
when measured in a common currency. If this is not the case it means that the purchasing power
of the two currencies is different.

Let us look at an example. Suppose that sugar is selling $1 in US and ₹20 in India a kilo then the
PPP-based exchange rate of rupee will be $1 = ₹20.

This is the way how The Economist of London has prepared its ‘Big Mac Index’ (comparing the
Mc Donald’s Big Mac burger prices in different economies). In theory, the value of currencies in
terms of their market exchange rate should converge with their value in terms of the PPP in the
long run. But that might not happen due to many factors like the fluctuations in inflation; level of
money supply; follow-up to the exchange rate regimes (fixed, floating, etc.), and other. For the
calculation of the PPP, a comparable basket of goods and services is selected (a very difficult
task) of the identical qualities and quantities. The other difficulty in computing PPP arises out of
the flaw in the ‘one price theory’ i.e., due to transportation cost, local taxes, level of production,
etc. The prices of goods and services cannot be the same in different markets (This is correct in
theory only, not possible in practice.)

Growth Rate: Per annum percentage change in GDP is the ‘growth rate’ of an economy.

The Central Statistics Office (CSO), in January 2015, released the new and revised data of
National Accounts, effecting two changes:

1. The Base Year was revised from 2004–05 to 2011–12. This was done in accordance with the
recommendation of the National Statistical Commission (NSC), which had advised to revise the
base year of all economic indices every five years.

2. This time, the methodology of calculating the National Accounts has also been revised in line
with the requirements of the System of National Accounts (SNA)-2008, an internationally
accepted standard.

The major changes incorporated in this revision are as given below:

(i) Headline growth rate will now be measured by GDP at constant market prices, which
will henceforth be referred to as ‘GDP’ (as is the practice internationally). Earlier,
growth was measured in terms of growth rate in GDP at factor cost and at constant
prices.
(ii) Sector-wise estimates of Gross Value Added (GVA) will now be given at basic prices
instead of factor cost.
GVA at basic prices = CE + OS/MI + CFC + production taxes less production
subsidies.
GVA at factor cost = GVA at basic prices – production taxes + production subsidies.
GDP = GVA at basic prices + product taxes – product subsidies.
 [Where, CE: compensation of employees; OS: operating surplus; MI: mixed income;
and CFC: consumption of fixed capital (i.e., depreciation).
Production taxes or production subsidies are paid or received with relation to
production and are independent of the volume of actual production. Some examples
of production taxes are land revenues, stamps and registration fees and tax on
profession. Some production subsidies are subsidies to Railways, input subsidies to
farmers, subsidies to village and small industries, administrative subsidies to
corporations or cooperatives, etc.
Product taxes or subsidies are paid or received on per unit of the product. Some
examples of product taxes are excise tax, sales tax, service tax and import and export
duties. Product subsidies include food, petroleum and fertilizer subsidies, interest
subsidies given to farmers, households, etc., through banks, and subsidies for
providing insurance to households at lower rates].
(iii) Comprehensive coverage of the corporate sector both in manufacturing and services
by incorporation of annual accounts of companies as filed with the Ministry of
Corporate Affairs (MCA) under their e-governance initiative, MCA21. Use of
MCA21 database for manufacturing companies has helped in accounting for activities
other than manufacturing undertaken by these companies.
(iv) Comprehensive coverage of the financial sector by inclusion of information from the
accounts of stock brokers, stock exchanges, asset management companies, mutual
funds and pension funds, and the regulatory bodies including the Securities and
Exchange Board of India (SEBI), Pension Fund Regulatory and Development
Authority (PFRDA) and Insurance Regulatory and Development Authority (IRDA).
(v) Improved coverage of activities of local bodies and autonomous institutions, covering
around 60 per cent of the grants/transfers provided to these institutions.

COMPARING GVA & GDP

Economic growth is estimated using two main methods—demand side and supply side.

Under supply side, the value-added by the various sectors in the economy (i.e., agriculture,
industry and services) are added up to derive the gross value added (GVA). This way, it captures
the income generated by all economic actors across the country.

Under the demand side, GDP is arrived by adding up all expenditures done in the economy.
Broadly speaking there are four sources of expenditures in an economy—namely, private
consumption (individuals and households), government, business enterprises, and net exports
(exports minus imports). It includes all the taxes received and all subsidies disbursed by the
government.
Thus, GDP is equal to GVA added with the net taxes (taxes minus subsidies).

While GDP is a good measure in comparative studies (comparing economies), GVA is a better
measure to compare different sectors within the economy. GVA is more important when looking
at quarterly growth data, because quarterly GDP is arrived at by apportioning the observed GVA
data into different spender categories.

National Debt: Public debt is the total loans of the government of a country. Since this
government is national, at times, this is also called ‘national debt’. But in broader sense the
national debt includes the non-government debt also.

Debts of the Governments:

While the Union Government of India is mandated to borrow inside and outside the country the
amount specified by the Parliament (Article 292), States are mandated (Article 293) to borrow
only inside the country. Beginning the financial year 2005–06, States were given access to
external loans also (on the recommendations of the 12th Finance Commission, 2005–10) for
which sovereign guarantee is given by the Centre. While the ‘general category’ states get
external loans on a back-to-back basis (i.e. cost of interest and risk of exchange rate fluctuations
borne by States), the ‘special category’ states get from the Centre in the combination of 90 per
cent loan and 10 per cent grant.

Public Debt of India: The liabilities of the Centre have three segments of it, namely—Internal
Liabilities, External Liabilities, and Public Account Liabilities. To the extent Public Debt of
India is concerned, it includes only Internal and External liabilities incurred by the Central
Government. The composition of the public debt is as briefed below:

1. Internal segment includes a variety of ‘instruments’ used by the Centre to mobilise

resources inside the economy, namely—

(i) Dated Securities: Popularly known as G-Secs (Government Securities), they are primarily
issued by Centre as fixed coupon bonds of different maturities (short-, medium- and long-
term). They are today the single-most important source of deficit financing (more than 90 per
cent) for the Centre.

(ii) Treasury Bills: T-Bills are zero coupon securities issued by the Centre at a discount and
are redeemed at their face value at maturity. Issued for short-term (less than 365 days) today
they have three tenures—91, 182 and 364 days.

(iii)14-Day T-Bills: These ‘non-transferable’ T-Bills (introduced by the RBI in 2013 to

finance Centre’s ways and means advances as issuance of ‘on-tap’ treasury bills was phased
out) are issued by the Centre to only States, foreign central banks and other specified bodies
at an interest rate fixed at 3 per cent below the average yield of 91- days T-Bills in the
preceding quarter.
(iv)Securities issued to International Financial Institutions: Securities issued by Centre as
India’s contributions to the international financial institutions such as the IMF, World Bank,
Asian Development Bank, etc.

(v) Securities issued against ‘Small Savings’: The deposits under small savings scheme
(SSSs) are credited to the NSSF (National Small Savings Fund) from which withdrawals also
keep taking place. Rest of the fund (net withdrawals) of the NSSF is invested in special G-
Secs issued by the Centre.

2. External segment of the public debt includes the external liabilities created through
external borrowings by the Centre for its own uses (excluding those taken by the States). This
constitutes a variety of ‘multilateral’ and ‘bilateral’ loans from IMF, World Bank, ADB,
Sovereign Funds, foreign governments, etc.

Adjusted Debt: In 2010, Government articulated the concept of adjusted debt which indicates
the debt amount after factoring in the impact of external debt (at current exchange rate of
rupee) and netting out Market Stabilization Scheme (which was abolished in 2014) and
NSSF (National Small Savings Scheme) liabilities not used for financing the deficit of the
Central Government. While analyzing the General Government Debt (consolidated debt for
Central and State Governments), 14 days T-bills investment by States and Central loans to
State Governments are also netted out to avoid double accounting.

Along with a quarterly report on public debt, an ‘Annual Status Paper on Government Debt’
(since 2010–11) is also published by the Government. The status paper aims to enhance
transparency by providing a detailed account of debt operations during the year and an
assessment of the health of the public debt based on internationally accepted debt
performance indicators.

Balance of Trade: Balance of trade refers to merchandise imports and exports; the BOT
refers to all economic transactions with the outside world. India’s merchandise trade balance
improved from 2009–14 to 2014–19, although most of the improvement in the latter period
was due to more than 50 per cent decline in crude prices in 2016–17.

In the case of a developed economy, inflation makes trade balance favourable, while for the
developing economies inflation is unfavourable for their balance of trade. This is because of
composition of their foreign trade. The benefit to export which inflation brings in to a
developing economy is usually lower than the loss it incurs due to its compulsory imports
which become costlier due to inflation.