Daily News Analysis

Gross Domestic Product (GDP)

1st June, 2021 Economy

GS PAPER III: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Context: India's Gross Domestic Product (GDP) contracted by 7.3% in 2020-21, as per provisional National Income estimates released by the National Statistical Office.

  • The Gross Value Added (GVA) in the economy shrank 6.2% in 2020-21, compared to a 4.1% rise in the previous year.
  • Only two sectors bucked the trend of negative GVA growth — agriculture, forestry and fishing, which rose 3.6%, and electricity, gas, water supply and other utility services (up 1.9%).

  • GVA from trade, hotels, transport, communication and broadcasting-related services recorded the sharpest decline of 18.2%, followed by construction (-8.6%), mining and quarrying (-8.5%) and manufacturing (-7.2%).

What is GDP of a country?

  • Gross Domestic Product, abbreviated as GDP, is the total value of goods and services produced in a country.
  • GDP is measured over specific time frames, such as a quarter or a year.
  • GDP as an economic indicator is used worldwide to show the economic health of a country.
  • For low-income or middle-income countries, high year-on-year GDP growth is essential to meet the growing needs of the population. Hence, the GDP growth rate of India is an essential indicator of the country’s economic development and progress.
  • Besides measuring the health of the economy and helping the government is framing policies, the GDP growth rate numbers are also useful for investors in better decision-making related to investments.
  • Different countries have different methods to calculate GDP.

How is GDP calculated in India?

  • The central statistical office, or CSO, is responsible for compiling data for calculating GDP.
  • It aggregates the GDP data by coordinating with several federal and state-run agencies.
  • Once the data collection process is completed, the task of calculating the GDP begins. There are two methods to arrive at the GDP number:
  • Known as GDP at factor cost, the first method looks at the economic activity
  • The second method is the expenditure-based method (at market prices).

Further, the nominal GDP is calculated using the current market price, and real GDP is arrived after adjusting inflation.

  • Among the four sets of GDP numbers, GDP at factor cost is the most commonly used figure and reported in the media.
  • While the GDP at factor cost reveals which industry sector is doing well, the expenditure-based GDP is indicative of the status of different areas of the economy; how the trade is doing or whether investments are on the decline.

From where is the GDP data sourced?

  • For the calculation of GDP at factor cost, data is taken from eight sectors, namely agriculture; mining and quarrying; manufacturing; forestry and fishing; electricity and gas supply; construction, trade, hotel, transport and communication; financing, real estate and insurance; and business services and community, social and public services.
  • For the calculation of expenditure-based GDP, all the spending incurred on final goods and services are added that include consumer spending, government spending, business investment spending, and net exports.
  • The government releases quarterly GDP numbers every two months, and the final numbers for the whole year are issued on May 31.