According to the provisional estimates released recently by the Ministry of Statistics and Programme Implementation, India’s gross domestic product (GDP) for financial year 2021-22 expanded to 8.7%, highest in 22 years in terms of back series data.
- The data also showed that the Gross Value Added (GVA) – another measure of national income, grew by 8.1% in FY22.
- Buoyant tax collections and higher nominal GDP growth (including inflation) assisted the Centre in keeping its fiscal deficit at 6.7% of GDP, compared to the 6.9% target for 2021-22.
Basic terminologies –
- Gross Domestic Product (GDP): It is defined as the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. In other words, it measures the value of total output in the economy by tracking the total demand.
- Sub-components of GDP (GDP = C + I + G + NX) —
- Consumption (C) — The biggest engine (56% of all GDP) is consumption demand from private individuals, technically known as Private Final Consumption Expenditure (PFCE).
- Investment (I) — The second-biggest engine (32%) is the investment demand generated by private sector businesses, also known as Gross Fixed Capital Formation (GFCF).
- Government (G) — The third engine (11%) is the demand for goods and services generated by the government (G) and is known as the Government Final Consumption Expenditure (GFCE).
- Net Exports (NX) — This is calculated by subtracting the demand for foreign goods by Indians (Indian imports) from the demand for Indian goods and services by foreigners (Indian exports).
- Nominal vs Real GDP —
- Nominal GDP (GDP calculated using current market prices) is the actual observed variable. However, Real GDP (GDP calculated using constant 2011-12 prices, after taking away the effect of inflation) is a derived metric.
- Real GDP = Nominal GDP – Inflation Rate. Inflation is the rate at which the value of a currency is falling and consequently the general level of prices for goods and services is rising.
- From the Budget-making perspective, it is important to note what has happened to nominal GDP (both absolute level and its growth rate). However, from the perspective of the common people, real GDP is what matters.
- Gross Value Added (GVA) — It examines the amount of value added (in monetary terms) in various productive areas of the economy. As a result, it tracks the total output in the economy by looking at the total supply.
- GDP vs GVA — GDP = (GVA) + (Taxes earned by the government) – (Subsidies provided by the government). The difference between these two absolute figures will reveal the government’s role in the process. For example,
- GDP > GVA, if the government generated more money from taxes than it spent on subsidies.
- GVA > GDP, if the government gave subsidies in excess of its tax collections.
- Fiscal deficit — A fiscal deficit is a shortfall in a government’s income compared with its spending. It is essentially a marker of the health of government finances and tracks the amount of money that a government has to borrow from the market to meet its expenses.