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Has India’s economic growth bypassed that of China?

India is one of the fastest growing major economies in the world in recent years. One of the major reasons behind India’s growth story is the BJP-led NDA government, who claim to be the source of this major spurt in growth of GDP figures over the past couple of years.

When the BJP-led National Democratic Alliance (NDA) came into power in 2014, the GDP growth rate of India was at 7.4%. In 2015, the GDP growth rate was at a rate of 8.2% – the highest rate in five years’ time.

However, there was a dip in the GDP growth rate in 2016 and 2017, i.e. 7.1% and 6.7% respectively, as a result of demonetization shock and the hasty introduction of Goods and Service Tax (GST) in the economy.

Presently, the validity of India’s growth has been solidified by the Modi-led government’s claims that India has been on par with China with the GDP growth rate of the Indian economy being projected at 7% for the financial year 2018-19.

What is Economic Growth of a country and how is it calculated?

Economic growth of a country is the cumulative addition of market value of all the goods and services produced in a country over a period of time. It is measured as the percentage increase in the real gross domestic product (GDP).

GDP is a single number which represents the monetary value of all the goods and services that are produced in a country for a specified period and all countries across the world have different methods of arriving the GDP number.

Here is a brief look at how India calculates its GDP:

Data Collection:

GDP calculation requires large amounts of data and the Central Statistics Office(CSO) is responsible for collecting macroeconomic data by conducting surveys of various industries and compilation of various indexes like Consumer Price Index (CPI) etc.

The CSOs job is to coordinate with various federal and state government agencies and other departments to collect the data required to calculate the GDP and other statistics.

For example, data points which are specific to manufacturing, crop yields, or commodities, can be used for the Wholesale Price Index (WPI) and CPI calculations, are gathered and calibrated by the Price Monitoring Cell in the Department of Consumer Affairs under the Ministry of Consumer Affairs.

All the required data points are collected and compiled at the CSO which is then used to arrive at GDP numbers.

How is GDP Calculated?

GDP is calculated using two methods:

The first method is based on economic activity based on factor cost. Factor cost is the cost incurred to produce goods and services. and the second derives GDP from market prices. Market prices are the actual selling price (for example M.R.P).

Factor Cost GDP Calculation

GDP from factor cost is derived by collecting data for the net change in the value of each sector during a given time period. The Indian government uses these 8 sectors in this cost:

  • Agriculture, forestry, and fishing
  • Manufacturing
  • Electricity, gas and water supply
  • Mining and quarrying
  • Construction
  • Financing, insurance, real estate, and business services
  • Trade, hotels, transport, and communication
  • Community, social and personal services
GDP calculation at factor cost

Here is a sample report from the second quarter of 2014 showing an overall GDP change at 6.9%

These numbers can be used by traders and investors alike to make sound investment decisions in the above sectors.

Market Prices GDP Calculation

GDP from market prices/expenditure is done by adding the domestic buying price of various goods and services produced in India for a specific period. Here is a breakdown of GDP using this method for Quater2 of 2014:

GDP calculation by Market Value

The GDP numbers may not exactly match for both these methods but they do provide a fairly good idea as to which parts of an economy contribute most to its growth.

For example, domestic household consumption which contributes 59.5% to the Indian economy is the reason why global slowdowns do not affect India.

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