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Home / IAS Preparation / Gross Domestic Product

Gross Domestic Product (GDP) of India - notes for UPSC!

Last Updated on Aug 19, 2022
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Gross Domestic Product (GDP) is the sum of the market values of all the finished products and services produced within any country’s borders during a certain time period. It is estimated on a regular basis to take into account adjustments to the structure of production, differences in pricing, and improved records of economic activity.

In this article, we will cover the Gross Domestic Product of India, its meaning, Recent updates on Gross Domestic Product, the Significance of Gross Domestic Product, the formula for calculating Gross Domestic Product, the Limitations of Gross Domestic Product, Types of Gross Domestic Product, Methods of estimation of Gross Domestic Product, Gross Domestic Product growth rate of India and some of the key highlights.

Download the PDF on Gross Domestic Product (GDP) notes for UPSC Exam here.

Gross Domestic Product is one of the important topics of Economy for the UPSC IAS examination for General Studies Paper 1(Prelims) and General Studies Paper 3( Mains).

Download Economy UPSC Notes to ace your preparation!

Recent Updates on GDP
  • For FY23, the domestic credit rating agency Crisil revised its real GDP growth prediction for India from 7.8 percent to 7.3 percent. The increase in oil costs, weakening export demand, and increasing inflationary pressures are all responsible for this.
  • Eminent experts predicted that in FY23, despite global headwinds mostly brought on by the ongoing Russia-Ukraine war, the Indian economy might grow by 7–7.8% on the strength of improved agricultural production and a revived rural sector.
  • As per Fitch ratings India’s Gross Domestic Product growth for the current fiscal year has been reduced to 7.8 percent, from an earlier prediction of 8.5 percent. India’s growth is projected to be approximately 7% from FY24 to FY27.
  • The World Bank and the Organization for Economic Cooperation and Development (OECD) have drastically reduced India’s growth prediction for FY23 from 8.1 percent to 6.9 percent. This is less than the Reserve Bank of India‘s projected increase of 7.2 percent. In 2021–2022, India’s Gross Domestic Product growth rate was 8.7% against 6.6 percent in the previous fiscal.

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What is GDP?

Gross Domestic Product (GDP) is the total monetary value of the final goods and services produced over a given period of time in an economy. Gross Domestic Product, or GDP, is an indicator of the market value of a nation’s economic activities.

  • The computation of a nation’s Gross Domestic Product takes into account both private and public consumption, government spending, investments, increases in private inventories, paid-in construction costs, and the international trade balance.
  • The foreign trade balance is the most crucial of all the elements that make up a nation’s Gross Domestic Product.
  • India’s Central Statistical Office (CSO) is in charge of estimating the country’s Gross Domestic Product, it generates the country’s Gross Domestic Product report every year. The Ministry of Finance bases its financial goals on the Gross Domestic Product figures (at current prices) in accordance with the Fiscal Responsibility and Budget Management Act 2003 and the Rules thereunder.
  • The gross domestic product (GDP) of a nation increases when the total value of goods and services exported by domestic producers to other countries exceeds the total value of imports of goods and services by domestic consumers. In such a case, a nation is said to have a trade surplus.
  • When domestic consumers buy more foreign goods than domestic producers can sell to overseas customers as a whole, a trade deficit results. This is a situation where the nation’s Gross Domestic Product decreases.

Learn about functions of GDP, NDP, and more.

Gross Domestic Product – Historical Background
  • In a report (1937) to the US Congress in reaction to the Great Depression, Simon Kuznets, an economist at the National Bureau of Economic Research, first put forth the idea of Gross Domestic Product.
  • The most popular method of measuring at the time was the gross national product (GNP). Following the Bretton Woods conference in 1944, the gross domestic product (GDP) was largely accepted as the standard tool for measuring the size of economies.
  • However, a number of economists and decision-makers started to question Gross Domestic Product starting in the 1950s.
  • Despite the fact that it ignores factors like health, happiness, equality, and other components of public welfare, some people have a tendency to view a country’s Gross Domestic Product as an absolute indicator of its success or failure.
  • These opponents, to put it another way, drew a distinction between social and economic progress.
  • The majority of specialists, like Arthur Okun, insisted that the gross domestic product (GDP) is an absolute indicator of economic performance and that there is a 1% point decrease in unemployment for every 3 point increase in GDP.

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Significance of GDP
  • Gross Domestic Product is a gauge of a nation’s economic health ans size.
    • Gross Domestic Product is analyzed by economists to determine if the economy is in a boom, depression, or recession.
  • Most governments and decision-makers in the economy can use it as an indicator when planning and putting various policies together.
  • By providing recommendations on the status of the economy, Gross Domestic Product aids investors in managing their portfolios.
  • Policymakers consider Gross Domestic Product while deciding on interest rates, trade agreements, and taxation in constructing fiscal and monetary policies.

Formula For Calculating GDP

GDP is defined as “Consumption + Investment + Government Spending + Net Exports,” or more simply as

(GDP = C + I + G + NX)

where net exports (NX) is a country’s exports minus its imports, investment (I) refers to business expenditures by businesses and home purchases by households, government spending (G) denotes expenditures on goods and services by the government, and consumption (C) denotes private-consumption expenditures by households and nonprofit organizations.

Limitations of GDP

  • Many facets of society, including many facets that affect economic well-being, aren’t considered in the GDP estimates because the measurement concentrates on market price.
  • The absence of environmental costs from GDP is one of the main issues with it. For instance, plastic is inexpensive because the cost of pollution is not factored into the price.
  • Another negative aspect is that unpaid services are excluded from GDP.
  • Even though they play a vital influence in a country’s economy and standard of living, it excludes things like child care and volunteering.
  • Additionally, the shadow or black economy is not taken into account by GDP.

Types of Gross Domestic Product

Real GDP

The real gross domestic product (real GDP), also known as constant-price GDP, or inflation-adjusted GDP, etc., measures the total value of all goods and services produced by an economy in a given year (expressed in base-year prices).

Nominal GDP

  • A country’s economic production is measured using its nominal GDP, who’s calculation is based on current prices.
  • To put it another way, it does not take into consideration inflation or the rate at which prices are increasing, both of which could exaggerate the growth rate.
  • The prices at which all goods and services were actually sold in that year are used to get the nominal GDP value for each item.

GDP Per Capita

  • The GDP per capita is an indicator of the GDP per person within a nation’s population.
  • It is the amount of output or income per person in country’s economy which indicates the average productivity or living standards in a particular economy.
  • GDP per capita numbers are available in nominal, real (inflation-adjusted), and PPP(Purchasing Power parity) units.

    • GDP Purchasing Power Parity (PPP)

    • PPP is a popular method used to compare currencies of different countries using a approach called “basket of Goods”. This allows economists to compare economic productivity and standard of living of the two countries.
    • Despite the fact that purchasing power parity (PPP) is not a direct measure of GDP, economists use it to compare real output, real income, and living standards between nations by adjusting for differences in local prices and expenses of living.

Methods of Estimation of GDP

Gross Domestic Product(GDP) cab be estimates by three methods namely

Method Formula Terms Used
Income Method Net national income = Employee compensation + Operating surplus (w + R + P + I) + Net income + Net factor income from abroad W = wage and salaries,

 

R = income from rental sources,

P = profit,

I = mixed-income.
Expenditure Method GDP=C+I+G+(X−M) C=Consumer spending on goods and services

 

I=Investor spending on business capital goods

G=Government spending on public goods and services

X=exports

M=imports
Output/ Production Method National Income = Gross national product – Cost of Capital – Depreciation – Indirect Taxes  

 

–

To understand the Methods of GDP/National Income Calculation in detail refer to the article attached.

Rebasing the GDP of India

  • The government frequently takes this action to make sure that the GDP accurately depicts the state of the economy in terms of structural changes, the significance of the contributions made by various sectors, the importance of the agricultural sector, etc.
  • Base year gives idea about how purchasing power is changing and helps calculate inflation adjusted growth also.
  • The base year use nowadays is 2011-12, earlier it was 2004-05.

Old Procedure of Estimation of GDP vs New Procedure of Estimation of GDP

Old Procedure of Estimation of GDP New Procedure of Estimation of GDP
Index of Industria Production (IIP) was used to assess manufacturing and trading activity in the previous system. This explained the volume changes but not the value changes. The idea of GVA (Gross Value Added) is used in the more recent technique to measure the value that has been added to the economy.
Industrial Production (IIP) data subsequently updated to using ASI data (Annual Survey of Industries). ASI only included companies that had registered under the Factories Act. Data from MCA 21 (a Ministry of Corporate Affairs e-governance scheme that was started in 2006 and allows businesses to electronically file their financial reports) is used in the more recent system.
Farm products were used as a stand-in for agricultural income in the previous system. The scope for estimating value addition in the agricultural industry has expanded in the new method.
In the previous method, only a small number of mutual funds and NBFCs were taken into account when evaluating financial activities. Stockbrokers, asset management funds, pension funds, stock exchanges, etc. are now included in the coverage in new method.

The trade income data used in the former system came from the National Sample Survey Office (NSSO) 1999 establishment survey, whereas the 2011-12 survey is utilized in the current series.

One of the major issues with new methodology is that the updated statistics do not account for other macroeconomic factors like tax receipts, credit expansion, trade performance, corporate sales, earnings, and most significantly the amount of investment made in the economy.

GDP Growth Rate of India
  • Agriculture, industry and services make up the three broad industries that contribute to India’s GDP.
  • The GDP growth rate turns positive as the economy grows because of rising consumption, investment, government spending, and trade volume. On the other hand, the country’s economy is said to be slowing down or in a condition of recession when the economy declines and the GDP growth rate turns negative.
  • The GDP growth rate is a useful indicator of the state of the economy. The four stages of the business cycle-peak, contraction, trough, and expansion-cause changes in its value.

To learn more about GDP growth rate in India visit the linked article.

Economic Survey Report of India 2022

Economic survey is an annual report of economy which is present a day before the budget is tabled. It gives the detailed information about how different sectors of the economy are performing and also provides with measures to be taken in future regarding various sectors. It consists of both the economic challenges the country is facing and the analysis of the last year.

To understand more about Meaning, Importance, Highlights of Economic Survey 2022 visit the article linked.

We hope all your doubts regarding the GDP are addressed after going through this article. Testbook provides comprehensive notes for different competitive examinations. It has always assured the quality of its product like content pages, live tests, Gk and current affairs, mocks, and so on. Ace your UPSC preparation with the Testbook App!

UPSC Mains Previous Year Questions

Q 1. Define potential GDP and explain its determinants. What are the factors that have been inhibiting India from realizing its potential GDP? (2020)

Q 2. Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments. (2019)

Q 3. “Industrial growth rate has lagged behind in the overall growth of Gross-Domestic-Product(GDP) in the post-reform period” Give reasons. How far the recent changes is Industrial Policy are capable of increasing the industrial growth rate? (2017)

More Articles for IAS Preparation

GDP of India FAQs

At present, the GDP of India is projected to grow by be 6.9% in FY 2022-23.

GDP of India is defined as "Consumption + Investment + Government Spending + Net Exports," or more simply as GDP = C + I + G + NX.

The GDP of India in 2021–22 was 147.35 trillion, which is only a modest 1.5% higher than the GDP of 145.16 trillion attained in 2019–20.

India's nominal GDP is expected to increase significantly from FY 2021, when it was valued at INR 198.01 trillion (US$2.55), to FY 2022, when it is projected to reach a level of INR 236.65 trillion (US$3.05 trillion) at the current prices.

India's nominal GDP ranks it as the fifth-largest economy in the world, and its PPP ranking places it third (PPP). India's nominal GDP rank was 142nd and its real GDP rank was 128th, respectively, according to the International Monetary Fund (IMF).

There are various reasons attached for India’s low GDP such as the increase in oil costs, weakening export demand, the ongoing Russia-Ukraine war and increasing inflationary pressures are all responsible for this.

The GDP size of India’s economy shrank slightly from Rs 113.55 lakh crore to Rs 113.45 lakh crore in 2013-14.
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