National Income Accounting
Contents
Understanding National Income Accounting:
National income accounting is a systematic framework for measuring the economic activity of a nation. It provides crucial indicators for policymakers, economists, and researchers to assess economic performance, formulate policies, and make international comparisons. In India, the National Statistical Office (NSO) under the Ministry of Statistics and Programme Implementation (MoSPI) is responsible for compiling these estimates.
The measurement of national income involves calculating the total value of goods and services produced within an economy during a specific period, typically a financial year. This framework has evolved significantly since India’s independence, reflecting structural transformations in the economy and aligning with international standards recommended by the United Nations System of National Accounts (UNSNA).
Gross Domestic Product (GDP)
Definition and Concept
Gross Domestic Product (GDP) represents the total monetary value of all final goods and services produced within a country’s geographical boundaries during a specific time period, regardless of the nationality of the producers. It is the most widely used indicator of economic activity and serves as the primary measure of a nation’s economic size and performance.
GDP includes production by both domestic and foreign factors of production operating within the country. For instance, if a Japanese company operates a manufacturing plant in India, the output of that plant is counted in India’s GDP.
Methods of Calculating GDP
There are three standard approaches to measuring GDP, each theoretically yielding the same result:
Production (Value Added) Method: This approach calculates GDP by summing the value added at each stage of production across all sectors of the economy. Value added is the difference between the value of output and the value of intermediate consumption. The Gross Value Added (GVA) across all sectors, when adjusted for taxes and subsidies on products, gives GDP at market prices.
Income Method: This method aggregates all factor incomes earned in the production process, including wages and salaries, rent, interest, and profits. It essentially measures GDP from the income side of the economy.
Expenditure Method: This approach sums all spending on final goods and services. The formula is:
GDP = C + I + G + (X – M)
where C = private consumption, I = gross investment, G = government spending, X = exports, and M = imports.
India currently follows the production (value added) method for official GDP calculation.
GDP at Factor Cost vs. Market Price
GDP at Factor Cost represents the total value of production excluding indirect taxes and including subsidies. It reflects the actual cost incurred by factors of production (land, labour, capital, and entrepreneurship) in producing goods and services.
Formula: GDP at Factor Cost = GDP at Market Price – Indirect Taxes + Subsidies
GDP at Market Price includes indirect taxes and excludes subsidies, representing the price consumers actually pay in the market.
Formula: GDP at Market Price = GDP at Factor Cost + Indirect Taxes – Subsidies
Officially, India calculates its national income at factor cost, as it better reflects the actual income earned by factors of production without the distorting effects of taxes and subsidies.
Net Domestic Product (NDP)
Concept and Calculation
Net Domestic Product (NDP) is derived from GDP by subtracting depreciation, also known as Capital Consumption Allowance (CCA) or Consumption of Fixed Capital. Depreciation represents the wear and tear of capital assets such as machinery, buildings, equipment, and infrastructure during the production process.
Formulas:
NDP at Factor Cost = GDP at Factor Cost – Depreciation
NDP at Market Price = GDP at Market Price – Depreciation
Significance
NDP provides a more accurate measure of the net value added by the economy, as it accounts for the replacement cost of capital goods consumed during production. While GDP measures gross output, NDP represents the actual net increase in the nation’s wealth available for consumption, savings, and new investment.
For example, if India’s GDP is ₹10 trillion and depreciation is ₹1 trillion, the real net increase to the country’s wealth is ₹9 trillion. The ₹1 trillion merely maintains the existing capital stock without contributing to new wealth creation.
Gross National Product (GNP)
Definition
Gross National Product (GNP) measures the total value of all final goods and services produced by the residents of a country, regardless of their geographical location, within a specific period. It differs from GDP by including income earned by domestic residents abroad while excluding income earned by foreign residents within the domestic territory.
Calculation
Formula: GNP = GDP + Net Factor Income from Abroad (NFIA)
Net Factor Income from Abroad (NFIA) = Factor income earned by residents abroad – Factor income earned by foreigners in India
For example, if an Indian software engineer works in the United States, their income is counted in the US GDP but in India’s GNP. Conversely, a foreign consultant working in India contributes to India’s GDP but not to its GNP.
GNP at Factor Cost and Market Price
GNP at Factor Cost = GDP at Factor Cost + NFIA
GNP at Market Price = GNP at Factor Cost + Indirect Taxes – Subsidies
Net National Product (NNP)
Concept
Net National Product (NNP) is derived from GNP by deducting depreciation. It represents the net value of goods and services produced by the country’s residents after accounting for capital consumption.
Formulas
NNP at Factor Cost = GNP at Factor Cost – Depreciation
NNP at Market Price = NNP at Factor Cost + Indirect Taxes – Subsidies
National Income
NNP at Factor Cost is considered as National Income of India. This is the most important indicator as it represents the total income earned by all factors of production (land, labour, capital, and entrepreneurship) in the economy.
Formula: National Income = NNP at Factor Cost = GNP at Factor Cost – Depreciation
National income serves as the basis for calculating per capita income, which is a key indicator of living standards and economic well-being.
Cost and Price of National Income
Understanding the distinction between different pricing mechanisms is crucial for accurate national income accounting.
Factor Cost vs. Market Cost
Factor Cost represents the actual production cost incurred by firms, including payments to all factors of production – rent for land, wages for labour, interest for capital, and profit for entrepreneurship. It is essentially the “factory price” from the producer’s perspective.
Market Cost is the price at which goods reach the market after adding indirect taxes paid to the government. When state taxes (like SGST) are further added, we get the Market Price or consumer price.
Relationship: Market Price = Factor Cost + Indirect Taxes – Subsidies
Example: If factor cost is ₹90, indirect taxes are ₹18, and subsidies are ₹8:
Market Price = 90 + 18 – 8 = ₹100
Constant Price vs. Current Price
Current Price (Nominal) refers to the value of goods and services at the prices prevailing in the current year, including the effect of inflation. Nominal GDP measures output at current market prices without adjusting for price changes.
Constant Price (Real) values goods and services at the prices of a selected base year, removing the effect of inflation. Real GDP reflects changes in actual production volume rather than price changes.
Importance: Estimates at constant prices provide a true measure of real economic growth by eliminating the distorting effects of inflation. Most developing economies, including India, calculate national income at constant prices for this reason.
The relationship between nominal and real GDP is captured by the GDP Deflator:
GDP Deflator = (Nominal GDP / Real GDP) × 100
The GDP deflator measures the change in the general price level of all goods and services included in GDP. In FY 2024-25, India’s GDP deflator was approximately 176 (with 2011-12 = 100), indicating significant price increases since the base year.
Taxes and National Income
Role of Indirect Taxes
Indirect taxes are taxes levied on the production or sale of goods and services, such as Goods and Services Tax (GST), excise duties, customs duties, and service tax. These taxes are collected by producers/sellers from consumers and paid to the government, increasing the gap between factor cost and market price.
Impact on National Income Accounting:
When calculating national income at market price, indirect taxes are added to factor cost
When converting from market price to factor cost, indirect taxes are subtracted
Formula: GDP at Market Price = GDP at Factor Cost + Indirect Taxes – Subsidies
Net Indirect Taxes
Net Indirect Taxes = Indirect Taxes – Subsidies
This net figure represents the government’s net revenue from product taxation. When net indirect taxes are positive, market prices exceed factor costs. When subsidies exceed taxes (negative net indirect taxes), factor cost exceeds market price.
Example: If GDP at market price is ₹5,500 crores, indirect taxes (GST) are ₹120 crores, and subsidies are ₹70 crores:
Net Indirect Taxes = 120 – 70 = ₹50 crores
GDP at Factor Cost = 5,500 – 50 = ₹5,450 crores
Subsidies and National Income
Concept of Subsidies
Subsidies are financial assistance provided by the government to producers or consumers to reduce the cost of production or consumption of specific goods and services. Common examples include fertilizer subsidies, food subsidies, petroleum subsidies, and export subsidies.
Impact on National Income
Subsidies reduce the market price of goods and services below their factor cost. When calculating national income:
Subsidies are added when converting from market price to factor cost
Subsidies are subtracted when converting from factor cost to market price
Relationship:
If Subsidies > Indirect Taxes: National Income at Factor Cost > National Income at Market Price
If Indirect Taxes > Subsidies: National Income at Market Price > National Income at Factor Cost
Calculation Example
If GNP at factor cost is ₹27,710 crores, consumption of fixed capital is ₹4,000 crores, factor income from abroad is ₹400 crores, factor income to abroad is ₹600 crores, indirect taxes are ₹120 crores, and NDP at market price is ₹24,000 crores, then:
Subsidies = GNP at FC – Depreciation – NFIA + Indirect Taxes – NDP at MP
= 27,710 – 4,000 – (400-600) + 120 – 24,000
= ₹30 crores
Base Year and National Income Accounting
Concept of Base Year
A base year is the reference year whose prices are used to calculate real GDP growth by removing the effect of inflation. It serves as a benchmark for comparing economic data across different time periods, helping economists understand shifts in purchasing power and compute inflation-adjusted growth figures.
Purpose:
Provides a consistent anchor for measuring economic performance over time
Enables meaningful comparisons by adjusting for price level changes
Reflects structural changes in the economy
Base Year Revisions in India Since Independence
India has undergone multiple base year revisions to keep pace with structural changes in the economy and align with international standards:
Historical Progression:
1948-49: First official base year announced in 1956
1960-61: Revised in August 1967
1970-71: Revised in January 1978
1980-81: Revised in February 1988
1993-94: Revised in February 1999
1999-2000: Revised in January 2006
2004-05: Revised on January 29, 2010
2011-12: Current base year, announced in January 2015
2022-23: Upcoming revision to be released in February 2026
Rationale for Base Year Revisions
Base year revisions are undertaken for several critical reasons:
Reflecting Structural Changes: India’s economy has transformed from an agrarian-dominated structure (pre-1990s) to a services-led economy (now contributing 55% of GDP). A new base year ensures inclusion of emerging sectors like digital services, the gig economy, and renewable energy, while reassessing or excluding declining traditional industries.
Improving Data Accuracy: Better data sources such as MCA-21 (Ministry of Corporate Affairs database) for the corporate sector replace outdated surveys. Fresh data from the National Sample Survey Office (NSSO) and Periodic Labour Force Survey (PLFS) improve informal sector estimates.
Removing Inflation Distortions: A new base year applies updated price weights to separate real growth from inflation effects. Using outdated prices (e.g., 2011-12) can overweight sectors that were cheaper in the base year, such as IT.
International Alignment: Revisions align with the UN System of National Accounts (SNA) guidelines, ensuring international comparability.
Current Base Year (2011-12)
The 2011-12 base year, introduced in January 2015, brought significant methodological changes:
Key Features:
Introduction of Gross Value Added (GVA) at basic prices as the primary measure, replacing GDP at factor cost
Alignment with SNA 2008 standards for international comparability
Incorporation of better data sources including MCA-21 corporate database
Expanded coverage of economic activities and improved sectoral classification
Upcoming Revision (2022-23 Base Year)
The government announced in 2024 that the base year will be revised to 2022-23, with new data to be released on February 27, 2026:
Advisory Committee on National Accounts Statistics (ACNAS): A 26-member committee chaired by Biswanath Goldar has been constituted to oversee this revision. The committee includes representatives from the Reserve Bank of India (RBI), central and state governments, and academia.
Scope of Revision:
GDP base year: 2022-23
Index of Industrial Production (IIP) base year: 2022-23
Consumer Price Index (CPI) base year: 2023-24 (based on ongoing market surveys)
Expected Benefits:
Capture economic changes post-pandemic
Reflect the impact of digital transformation and formalization through GST
Improve accuracy of sectoral contributions
Better represent the current structure of production and consumption
Gross Value Added (GVA) at Basic Prices:
Concept
Gross Value Added (GVA) measures the value of output at the prices received by producers, excluding product taxes but including production subsidies. It represents the contribution of labour and capital to the production process.
Formula: GVA = Output – Intermediate Consumption
GVA at Basic Prices vs. Factor Cost
GVA at Basic Prices:
Excludes product taxes (GST, excise duty, customs duty)
Includes production subsidies
Excludes product subsidies
Includes other taxes on production
Formula: GVA at Basic Prices = GVA at Factor Cost + (Other Taxes on Production – Other Subsidies on Production)
GVA at Factor Cost (used before 2015):
Excludes all taxes (both product and production taxes)
Includes all subsidies (both product and production subsidies)
Reflects income earned by factors of production
Relationship with GDP
GDP at Market Price = GVA + Product Taxes – Product Subsidies
Alternatively:
GVA = GDP at Market Price + Product Subsidies – Product Taxes
The transition from GDP at factor cost to GVA at basic prices in 2015 was made to align India’s national accounts with international standards (SNA 2008).
Sectoral GVA
The NSO provides GVA estimates for eight broad sectors:
Agriculture, Forestry and Fishing
Mining and Quarrying
Manufacturing
Electricity, Gas, Water Supply and Other Utility Services
Construction
Trade, Hotels, Transport, Communication and Broadcasting Services
Financial, Real Estate and Professional Services
Public Administration, Defence and Other Services
Historical Data and Statistics from Independence
GDP Growth Trajectory (1947-2025)
Phase 1 (1950-51 to 1979-80): “Hindu Rate of Growth”
India’s economy grew at an average rate of approximately 3.5% per annum during this period, characterized by socialist experimentation and the License Raj system. Per capita GDP grew at just 1.3% annually. This phase witnessed:
First Plan (1950-51): 4.2% growth
Second Plan (1956-61): 4.2% growth focused on heavy industry
Third Plan (1961-66): Slowdown to 2.6% growth
Fourth Plan (1969-74): 3.2% growth
Fifth Plan (1974-79): Improved to 4.9% growth
The “Hindu rate of growth” was a term coined by Indian economist Raj Krishna in 1978 to describe India’s slow economic growth between the 1950s and 1980s, which averaged about 3.5% annually. It was a derogatory term that referred to the period before the economic liberalization reforms of 1991 and suggested that the low growth was due to the country’s policies and possibly societal factors.
Phase 2 (1980s): Early Liberalization
GDP growth accelerated to an average of 5.6% in the 1980s, with the 1988-91 period recording 7.6% growth. This “liberalization by stealth” phase saw:
Sixth Plan (1980-85): 5.4% growth
Seventh Plan (1985-90): 5.5-5.8% growth
High growth period (1988-91): 7.6% annual growth
Investment increased from about 19% of GDP in the early 1970s to nearly 25% in the early 1980s.
Phase 3 (1991 onwards): Economic Liberalization
The 1991 economic reforms transformed India’s growth trajectory:
Crisis Period (1990-92): GDP growth fell to 3.0% during the balance of payments crisis
Post-Reform Boom:
Eighth Plan (1992-97): 6.7% growth
Ninth Plan (1997-2002): 5.5% growth
2000s: Average 6-7% growth
2006-07: 9.2% growth – highest pre-pandemic rate
Recent Performance:
Q2 2020: -23.1% (pandemic impact – record low)
Q2 2021: 22.6% (recovery – record high)
2021-24: Average 8% annual growth
Q2 2025: 7.8% growth
India’s GDP grew from $267.52 billion in 1992 to $3,912.69 billion in 2024, making it the world’s fifth-largest economy.
Per Capita Income Evolution
International Dollar Terms (PPP):
1980: $526
1990: $1,089 (107% increase)
2000: $1,887
2010: $3,812
2024: $11,112
Rupee Terms (at 2011-12 constant prices):
2014-15: ₹72,805
2019-20: ₹94,270
2020-21: ₹86,054 (-8.9% due to pandemic)
2022-23: ₹99,404 (35.12% increase from 2014-15)
2024-25: ₹114,710 (projected)
Sectoral Transformation
Agriculture’s Declining Share:
1950-51: 51.45-55.2% of GDP
1960-61: 47.65%
2001-02: 22.42%
2011-12: 14.10%
2022-23: 18.42%
Despite contributing only 18-20% to GDP, agriculture employs approximately 52.1% of India’s workforce, making it the largest unorganized sector.
Industry’s Steady Contribution:
1950-51: 16.6%
2013-14: 26.2%
2020-21: 25.92%
Services Sector Dominance:
1950-51: ~28%
2011-12: ~61%
2020-21: 53.89%
This structural transformation reflects India’s evolution from an agrarian economy to a modern services-oriented economy.
Economic Reforms Impact (1991)
The New Economic Policy of 1991 had transformative effects:
Pre-1991 Context:
Foreign exchange reserves: $5.8 billion (barely 2 weeks of imports)
Fiscal deficit: 8% of GDP
Current account deficit: 2.5% of GDP
GDP growth: 3-4% average
Post-1991 Achievements:
Foreign exchange reserves: $704.89 billion by September 2024
FDI inflows: From $97 million in 1991 to $81.04 billion in FY 2024-25
GDP growth: Accelerated to 6-7% average, with double-digit growth in 2006-07
Poverty reduction: 170 million people lifted out of poverty between 2011-12 and 2022-23
Related Concepts and Additional Measures
Personal Income (PI)
Personal Income represents the total income received by individuals and households before taxes are deducted. It includes wages, salaries, rent, interest, and profits, but excludes corporate taxes and undistributed corporate profits.
Disposable Income (DI)
Disposable Income is the income remaining after paying direct taxes. It represents the amount available for consumption or saving by individuals.
Formula: Disposable Income = Personal Income – Taxes
Per Capita Income
Per Capita Income is calculated by dividing national income (NNP at factor cost) by the total population. It serves as an indicator of average living standards and economic well-being.
Formula: Per Capita Income = National Income / Total Population
India’s per capita income in 2024-25 was ₹2,05,324 (at current prices) and ₹1,14,710 (at 2011-12 constant prices).
Key Organizations and Methodologies
National Statistical Office (NSO)
The National Statistical Office, formed in 2019 through the merger of the Central Statistical Office (CSO) and National Sample Survey Office (NSSO), is the nodal agency for estimating national income in India. It functions under the Ministry of Statistics and Programme Implementation (MoSPI).
Responsibilities:
Preparation of national income estimates at both current and constant prices
Publishing National Accounts Statistics regularly
Maintaining methodology documentation in “National Accounts Statistics – Sources and Methods”
Conducting periodic surveys for data collection
Methods Employed
NSO uses all three standard methods – production, income, and expenditure approaches – with the production (value added) method being primary for official estimates.
Understanding Formula Relationships
Key conversion formulas:
GDP at FC = GDP at MP – Net Indirect Taxes
NDP = GDP – Depreciation
GNP = GDP + NFIA
NNP (National Income) = GNP – Depreciation
GDP at MP = GVA + Product Taxes – Product Subsidies
Current Affairs Relevance
Recent Developments:
Base year revision to 2022-23 announced for implementation in February 2026
India became the 5th largest economy in 2024 with GDP of $3,912.69 billion
Q2 2025 GDP growth of 7.8% demonstrates continued economic resilience
Foreign exchange reserves crossed $700 billion in September 2024
Economic Survey and Budget Analysis
Understanding national income concepts is crucial for analyzing:
Economic Survey presentations of growth rates and sectoral performance
Budget documents that use GDP for fiscal deficit targets (under FRBM Act)
Comparisons between nominal and real growth rates
Impact of government policies on subsidies and taxation
Limitations of National Income Accounting
Exclusions:
Non-market activities (household work, volunteer services)
Informal economy contributions (often underestimated)
Environmental degradation and resource depletion
Measurement Issues:
Does not reflect income inequality or distribution
Does not measure welfare or quality of life
Heavily dependent on data accuracy and methodology
