GROSS DOMESTIC PRODUCT GDP and its components in India: Trends and Issues since

1991

Gross Domestic product is monetary measure of all the final goods and services produced within

a country in fixed period of time. GDP is mostly used to determine the economic performance

and standard of living of the country and it also helps in comparison between different countries.

GDP measures only of final output or value added at each stage of production, but not for total

output or sales. It does not include Business to Business (B2B) transactions in early stage as well

as used goods. GDP includes the value of finished goods and services which are ready to be used

by consumers, business and government and it is a best way to examine what’s happening in the

economy of a country. Organization for Economic Co-operation and Development defines GDP

”an aggregate measure of production equal to sum of the gross value added of all resident,

institutions”. GDP can also be calculated by contribution from different sectors of the economy

i.e. agricultural sector, service sector and manufacturing sector. The GDP pattern or trends

explains about the success or failure of economy policy and to determine whether the economy is

“in recession” or having “inflation” in the economy.

GDP = Gross national expenditure + External balance on goods and services

GDP = Agriculture value added + Industry value added + Services value added.

Growth of GDP can be classified in three different phases:

Phase1- Independence to mid-1960s: Under this period we saw a significant acceleration in the

growth in GDP and over the decade Industry sector was marked by a high growth, and a

significant structural change with a large increase in the share of non-agricultural sector.

Phase 2- After 1960 and pre-1991: this period was marked by a slower growth in the GDP,

accompanied by a declaration in the growth of industry, economy had a slow structural shift

from agriculture to non-agriculture and there was small increase in the share of industry.

Phase 3- Post-1991: since 1980 in that period GDP showed acceleration in the growth rate,

mainly contributed by service sectors, but there was a decline in agricultural sector, but Industry

sector had a little share. But Post 1991 Service sector was the major contributor in GDP due to

liberalization, Agricultural sector kept on decreasing whereas, Industry sector had a stagnated

growth.

Components of GDP:

Calculation of GDP through Expenditure method:

Y= C+I+G+(N-X)

Consumption (C): Consumption is largest GDP component in the economy, which

includes private (household final consumption expenditure) in the economy. Under the

Consumption head we include durable goods, non-durable goods, and services.

(Ex- food, medical expenses, rent, clothing but it does not include purchase of any fixed

assets like purchase of new housing).

Investment (I): Investment includes, business investment in equipment, but does not

exchange of existing assets. (Ex- purchase of new hose, construction of new mine, etc.).

Government Expenditure (G): Government expenditure or spending is the sum of

overall government expenditure on final goods and services like giving salaries to public

servant, purchase of new weapons for military and any investment expenditure by a

government. It does not include transfer of payment like securities etc.

Exports (X): Exports represents gross exports. GDP captures the amount of goods

produced within a country for the consumption of other country, therefore exports are

added.

Imports (M): Imports represents gross imports. Imports are subtracted because those

goods will be added either in consumption or investment or government, and must be

deducted to avoid foreign counting.

Sector wise Contribution towards GDP:

Indian economy is divided into three sectors:

Primary Sector: Agriculture, agribusiness, Fishing, Forestry, and all mining and

quarrying activities.

Secondary Sector: Industry, Manufacturing and Construction.

Tertiary Sector: Banking, Insurance, Transport and other Social and Personal Services.

Primary Sector: The primary sector of the economy which changes the natural resources to

primary products. Most products from this sector provide raw material to other industries. The

share of primary sector is kept on decreasing throughout the period. In present period Primary

sector contribute only 17%. Contribution of Agricultural sector in GDP has declining throughout

the period i.e. in 1990-91 it contributes 30% and declined to 14.5% in 2010-11, the growth

performance of this sector has been fluctuating, it had growth rate of 4.8% in Eighth Five year

Plan (1992-97), however this situation taken a downturn in the Ninth Five Year Plan (1997-

2002) in which it attains only 2.5% growth and 2.4% in Tenth Five year Plan (2002-2007). The

trend of growth rate from the period of 1992-39 to 2010-11 is about 2.8%, whereas, average

annual rate of growth in agriculture and allied services was 3.2%. Although there was a decline

in the growth rate and share in GDP but then also India managed to be among the top countries

in production perspective. The decline in the growth rate of Agriculture sector would be:

Slow and uneven growth.

Use of old and obsolete machine and irrigation facilities.

Flaw in land reforms (small size of land holding, exploitation of penants).

Improper Financial Assistance towards Farmers.

Problems related to storage, warehouses, marketing, communication and transport.