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GDP: What is it all about? - Views on News from Equitymaster
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  • Feb 5, 2001

    GDP: What is it all about?

    Like productivity of a company is quantified on the basis of output or rather sales, output of an economy is quantified in terms of Gross Domestic Product or popularly known as GDP. Now, what are the constituents of GDP? Agriculture, Industry and Services are the three main components of measuring output of an economy. If we cumulate the net output of these three broad components of a quantifying output, we arrive at GDP.

    Per-capita GDP
    Country US$
    US 29,080
    Germany 28,020
    Japan 38,160
    Malaysia 4,530
    Singapore 32,810
    China 860
    India 350

    If we were to divide this by population, we arrive at GDP per capita, which puts forth the output per person. India's per capita GDP is around US$ 350 (Rs 16,450). This when compared to US, Germany, Japan, Malaysia, Singapore and China are relatively low. There are two ways of measuring GDP. One is current or nominal GDP, which is measured on the basis of prevailing value of rupee and current output. The other mode of measuring GDP is constant or real GDP, which is quantified by keeping the rupee value constant at 1980 exchange rate.

    Components of GDP
    Sector FY98 FY99 FY00
    Agriculture (% growth) - 1.9 7.2 1.3
    Share in real GDP 26.7 26.8 25.5
    Industry (% growth) 4.9 3.7 7.5
    Share in real GDP 22.7 22.0 22.2
    Services (% growth) 9.2 8.0 8.7
    Share in real GDP 50.6 51.2 52.3
    Real GDP 5.0 6.8 6.4

    Agriculture output plays a vital role in India's gross domestic product. India is basically an agricultural dependent economy (close to 50% of Indian population are dependent on agricultural income). This has a significant effect in consumer spending power. Indian agriculture output comprises of Rabi (winter crop) and Khariff (summer harvest), which are primarily dependent on monsoons. Hence, whenever rainfall was average, India's GDP decelerates as agriculture output slows down. So, if the agricultural output has to improve, rainfall and irrigational facilities should be adequate.

    Agriculture production
    (% growth) FY98 FY99 FY00
    Food grain 192 203 206
    Khariff (summer) 102 103 104
    % of output 53% 51% 50%
    Rabi (winter) 90 100 102
    % of output 47% 49% 50%

    The effect of the service sector (excluding software and other related services) on economy is quite significant because it has its concurrent effect on productivity, employment and trade. By services, we mean, trade, hotels, transport, communication, financing, real estate, business services, community services and personal services. Areas where Indian economy has huge potential is tourism, insurance, financial and business services. The contribution from this segment is on the rise, post-liberalisation, which is apparent from the table below.

    (% growth) FY98 FY99 FY00
    Construction 10.3 5.7 9.1
    Trade, hotels & restaurants 4.5 8.4 6.7
    Transport, storage & communications 8.3 7.4 NA
    Finance, Insurance, real
    estate & business services

    11.8 6.1 10.6
    Social & personal services 12.2 10.9 10.0

    Industrial Production:
    The core components of industrial production are mining, quarrying, manufacturing, electricity, water and gas supply. Apart from public services, growth in manufacturing sector has been on the decline for the last three years. The growth in manufacturing is lower compared to other developed countries because industrial revolution did not take place in a more materialistic way as it did in say, US or European economies. This was primarily because of bureaucratic government policies and under utilisation of assets by public sector units. However, Indian companies have realised the need to improvise their efficiency standard to become globally competitive. So, one can expect manufacturing sector growth to accelerate in coming years.

    If we were to analyse the performance of industrial production and GDP growth, they do not seem have positive co-relation. GDP growth has actually declined whenever there is a sharp recovery in the industrial production for the last seven years. In effect, one important aspect to note is that agriculture and service contribution has a higher implication on GDP output as compared to the industrial production.

    (% growth) FY98 FY99 FY00
    Mining & Quarrying 9.0 - 0.5 0.3
    Manufacturing 4.0 3.6 8.5
    Electricity, water and gas supply 7.2 7.9 7.4

    The transformation of any developing economy takes place through three vital stages. The first stage would be from an agrarian economy to an industrial economy. Then, both progress and output accelerates when the economy becomes a service-oriented. The transformation between the last two phases has been quite dramatic in major economic powerhouses like US, Germany, and Japan, which have shown remarkable growth in the past.

    So, where is India placed on these scales? Is it an agrarian economy or an industrial economy or a service based economy? Though India is still an agrarian economy, the contribution from services post-liberalisation is quite significant and has increased. The process of transformation from an agrarian economy to an industrial economy to a service based economy is gradually happening in India. As the government accelerates the reform process, hopefully, one can expect that both productivity and income levels to increase in coming years. This would truly place India as one of the fastest growing economies in the world. India may have missed the industrial revolution but is doing well to keep pace with the information revolution. This gives up hope.



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