GS-3:​​Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Key phrases:  GDP, Private Final Consumption Expenditure, Gross Fixed Capital Formation

Why in news:

• The Indian economy has gained momentum during the July-September period after a devastating second wave.
• Gross domestic product (GDP) for the second quarter of the financial year grew by 8.4% from a year ago, one of the fastest rates among major economies. The economy had contracted 7.4% in the same period last year.

Analysis:

Present Scenario of Indian Economy:

• The Indian economy expanded at a record rate of 20.1% in the first quarter, mainly on account of the low base of last year. 
• In nominal terms, without adjusting for inflation, the GDP growth surged 17.5% during the second quarter, FY 2021-22
• Gross fixed capital formation, which is a measure for investments in the economy, surged 11%.
• The GDP growth for Q2 at 8.4% confirms that the economy gained traction in the second quarter. 
• Private consumption, which is a major contributor to the economy and as measured by Private Final Consumption Expenditure (PFCE) increased by 8.6% in the September quarter. 

GDP:

• Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. 
• As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health.
• GDP is calculated by the Central Statistics Office under the Ministry of Statistics and Program.

Methods to calculate GDP:

• The expenditures approach says 

GDP = C + G + I + NX

C=Consumption (Private Final Consumption Expenditure)

G=Government spending (Government Final Consumption Expenditure)

I=Investment (Gross Fixed Capital Formation + Change in Stocks)

NX=Net Exports of Goods & Services

• The income approach sums the factor incomes to the factors of production.
• The output approach is also called the “net product” or “value added” approach.
• Nominal GDP: Nominal GDP is the market value of goods and services produced in an economy, unadjusted for inflation. 
• Real GDP: Real GDP is nominal GDP, adjusted for inflation to reflect changes in real output.
• GDP Per Capita: GDP per capita is a measurement of the GDP per person in a country’s population
• GDP Growth Rate: The GDP growth rate compares the year-over-year (or quarterly) change in a country’s economic output to measure how fast an economy is growing. Usually expressed as a percentage rate
• Gross National Product (GNP): GNP is a measurement of the overall production of people or corporations native to a country, including those based abroad. GNP excludes domestic production by foreigners.
• Gross National Income (GNI): GNI is another measure of economic growth. It is the sum of all income earned by citizens or nationals of a country regardless of whether the underlying economic activity takes place domestically or abroad.
• Gross Value Added(GVA): Gross Value Added is the measure of the value of goods and services produced in an area, industry or sector of an economy.

Gross Value Added = GDP + subsidies on products – taxes on products.

Importance of GDP Calculation:

• GDP enables policymakers and central banks to judge whether the economy is contracting or expanding and promptly take necessary action. 
• It also allows policymakers, economists, and businesses to analyze the impact of variables such as monetary and fiscal policy, economic shocks, and tax and spending plans.
• GDP gives the overall health of an economy.

Criticisms of GDP calculation

• It ignores the value of informal or unrecorded economic activity
• It is geographically limited in a globally open economy
• It emphasizes material output without considering overall well-being
• It ignores business-to-business activity— GDP considers only final goods production and new capital investment and deliberately nets out intermediate spending and transactions between businesses
• It counts costs and waste as economic benefits

Conclusion:

A faster pace of vaccinations and a drop in cases have also led to a pick up in the economic activity during the second quarter. However, the latest threat from the Omicron variant looms large, which has already triggered the return of travel restrictions. While the Indian economy is yet to see any impact, the news is weighing on the sentiments in the currency and stock markets.

Source: Live mint

Prelims Question:

Q. Which of the following can be a component of the Gross Domestic Product (GDP) of India?

1. All the money that Indians spend as private-individuals-spend.
2. All the money that the government spends.
3. All the money that businesses spend (or invest).
4. The net effect of exports (what foreigners spend on our goods) and imports (what Indians spend on foreign goods)

Which of the statements given above are correct?

(a) 1, 2 and 3 only

(b) 2 and 4 only

(c) 1 and 3 only

(d) All 1, 2, 3 and 4

Answer: (d)