We analysts keep doing a number of estimations based on country’s GDP. Most of the variables are best remembered and analysed as % of GDP- investment, savings, market capitalization, exports, imports etc etc. The growth rates in GDP and its components are one of the most important variables looked upon by analysts.
So, the question is how do we compute GDP? CSO provides an explanation (you need to register, it is free). As per National Income Accounting there are 3 ways to compute GDP:
- Product wise: Calculating the total production
- Income wise: Calculating the total incomes received by factors of production – labour & capital
- Expenditure wise: Calculating the total expenditure of all the entities.
In a way all the three are part of a cycle…You begin production by using factors (labour and capital) and then you pay them incomes which they eventually spend purchasing items of their need. So, which ever way you take it, each of the estimates, should provide you the same GDP. But all these calculations have errors and in reality we never have one figure.
In India, for all these years we have been getting GDP Product-wise i.e. we have 8 sectors, we calculate how much has been produced (value added that is) in each sector and aggregate it to get GDP figure. We also get GDP based on state levels.
If you look at the Expenditure approach, it is the classic Keynesian equation:
Y = C + I + G + (X-M)
Y – Income (or GDP)
C- Consumption (or Private Final Consumption Expenditure).
I- Investment (or Gross Final Consumption Exp)
So, now you have two ways to get your GDP number. And yes there are discrepancies which are mentioned in the press release.
What do the two kinds of GDP approaches tell me?
The Product approach tells me how much each sector is growing and contributing to GDP. For instance, whenever we read agriculture growing by this much, services by this much etc this approach is used.
The expenditure approach tells me whether GDP growth is happening via consumption or investment.
I have already mentioned about the recent developments in sectoral growth here and keep posting about it via IIP releases.
Now, the expenditure approach tells me quite a few things:
- Consumption contributes most to the GDP. PFCE is 62% of GDP in 2004-05 and has decreased to 58% in 2006-07.
- Investment has been rising and has increased from 26% in 04-05 to 28% in 06-07.
- This is consistent with the evidence provided in the Economic Advisory Council report (which I covered here). However, it looked at growth of personal credit as an indicator for consumption led growth, this is a better evidence of the same phenomenon. The report raised concern that India needs to move more to investment driven growth and we see that happening. However, magnitude of shift is pretty small.
- The EAC report also said India needs to look at sprucing up exports but we don’t see that happening. The exports as a % of GDP has been falling and was at 17.6% in 06-07 compared to 18.4% in 2004-05. The same figure for imports has risen from 16.1% to 16.5% in the same period.
Hence a bit of mixed evidence, We see investments increasing but exports are falling. With rupee appreciation, the exports are going to fall further this year (I have covered it here).
Keep visiting this blog for further developments.