GS Paper 3
Syllabus: Indian Economy
Source: IE
Context: Accurate GDP measurement is crucial for India’s economic goals. Currently, India’s GDP base year is outdated (2011-12), which may not capture recent economic activities and investments.
What is GDP?
Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.
- India’s GDP is calculated by the Central Statistics Office (CSO), which is part of the Ministry of Statistics and Program Implementation (MoSPI).
How is it Calculated?
India’s GDP is calculated with two different methods, one based on economic activity (at factor cost), and the second on expenditure (at market prices). The factor cost method assesses the performance of eight different industries. The expenditure-based method indicates how different areas of the economy are performing, such as trade, investments, and personal consumption.
Accurate GDP measurement matters because it:
- Reflects True Growth: It represents India’s economic growth accurately.
- Captures New Activities: Ensures inclusion of new economic activities and private initiatives.
- Informs Policy: Essential for effective policymaking and achieving the goal of a $5 trillion economy.
- Attracts Investments: Enhances India’s global image and can attract foreign investments.
- Encourages Citizen Participation: Informs citizens, fostering cooperation toward economic goals.
To improve GDP measurement:
| Improvements | Actions |
| Update Base Year | Update the base year to capture new economic activities. |
| Use New Data Sets | Utilize GST and digital payment data for accuracy. |
| Implement Supply Use Tables | Use supply use tables to reconcile statistics. |
| Initiate Revision Process | Start the base year revision promptly. |
| Form Advisory Committees | Create expert committees to guide the process. |
| Publish Relevant Surveys | Share results of surveys, like consumer expenditure. |
However, there are still limitations to the GDP method of calculating growth:
| GDP Limitations | Issues with GDP |
| Not a Welfare Measure | GDP doesn’t measure overall well-being or happiness. |
| Simon Kuznets, who developed the concept of GDP, warned it was not a suitable measure of a country’s economic development | |
| Weak Relationship Between Growth and Employment | State of Working India (SWI 2023) report indicates that the connection between GDP growth and employment in India is weak. Growth in GDP doesn’t assure proportional job creation. |
| The same report says that the employment benefits of growth aren’t equally shared among genders, castes, or religions. | |
| No Adjustment for Leisure Time | Ignores differences in work hours and leisure time. |
| Misses Home Production | Doesn’t account for informal or home-based economic activity. |
| Income Distribution | Doesn’t reflect income distribution within a country. |
| Ignores Pollution Costs | Fails to factor in environmental or social costs. |
| Fails to Measure Human Well-Being | Doesn’t encompass aspects like happiness or community. |
| Unequal Progress | Doesn’t address wealth inequality and social disparities. |
| Ignores Non-Monetized Activity | Doesn’t value activities like volunteering or housework. |
| Neglects Sustainability | Doesn’t account for the environmental impact of growth. |
Suggestions for alternatives to GDP:
| Suggestions |
| Explore the use of Green GDP to account for environmental factors. |
| Explore alternatives to GDP such as OECD’s “GDP alternatives” that adjust for leisure and other factors. |
| Consider the “Index of Sustainable Economic Welfare” that accounts for pollution costs and income distribution. |
| Explore the “Genuine Progress Indicator” that adjusts for income distribution, household work, and more. |
| Explore well-being measures like the Happy Planet Index, Gross National Happiness, and National Well-Being Accounts. |
Ways to link GDP growth with better Job Creation in India:
| Ways | Description |
| Focus on Labor-Intensive Manufacturing | Prioritize labour-intensive manufacturing, even for domestic consumption, to boost job creation. |
| Diversify Growth Strategies | Develop diversified growth strategies that emphasize not just GDP growth but also the creation of high-quality jobs and addressing employment elasticity. |
| National Employment Policy | Implement a National Employment Policy to address both labour supply and demand, enhancing the quantity and quality of employment opportunities. |
| Explore Green Manufacturing | Explore opportunities in green manufacturing to reshape India’s industrial development in a sustainable manner. |
| Address Structural Issues | Tackle structural issues in the economy related to caste, gender, and religion to ensure equitable distribution of growth benefits. |
Insta Links:
Mains Links:
What is Gross Domestic Product (GDP)? Examine the limitations pertaining to GDP as an economic performance measurement framework of the country. (250 words)
Prelims Links:
Consider the following statements:
- Nominal GDP is calculated in a way such that the goods and services are evaluated at some constant set of prices.
- If the Real GDP changes, it implies that the volume of production is undergoing changes.
- The ratio of nominal GDP to real GDP gives us an idea of how the prices have moved from the base year to the current year.
Which of the above statements is/are correct?
- a) 1, 2
- b) 1, 3
- c) 2, 3
- d) 1, 2, 3
Solution: c)
