BCom National Income of India Notes Study Material

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BCom National Income of India Notes Study Material

CONCEPT OF NATIONAL INCOME

National Income is a monetary measure of the Income generated within a national territory plus net income received from abroad during a given period. In other words, a total national income measures the flow of goods and services in an economy. Thus, national income measures the productive power of an economy in a given period to turn out goods and services for the satisfaction of human wants.

In the broad-spectrum, National Income refers to the money value of all final goods and services produced by residents of a country while working both within and outside the domestic territory of the country in an accounting year. It also includes net factor income from abroad. To be more precise, it is the sum of the domestic factor income and the net factor income from abroad.

DEFINITIONS OF NATIONAL INCOME

The term ‘National Income’ has been defined by different scholars in different ways:

According to Marshall, “The labor and capital of a country acting on its natural resources annually produce a net aggregate of commodities, material and immaterial including services of all kinds.”

“The national income consists of a collection of goods and services reduced to a common basis by being measured in terms of money.” -Hicks

According to Pigou, “the national income is that part of the objective income of the community, including of course income derived from abroad, which can be measured in money.”

Modern economists have defined National Income in different ways as below:

“It is the net output of commodities and services flowing during the year from the country’s productive system in the hands of the ultimate consumers.” -Simon Kuznets

“National Income Statistics provide a wide view of the country’s entire economy, as well as of the various groups in the population who participate as producers and income receivers, and that, it available over a substantial period, they reveal clearly the basic changes in the country’s economy in the past and suggest, if not fully reveal, trends for the future.” -National Income Committee (1951)

Finally, we can say that National Income is the sum of domestic factors income and net factors income earned from abroad, accruing to the national residents of a country. (BCom National Income of India Notes Study Material)

NATIONAL INCOME ESTIMATES IN INDIA

According to the National Income Committee, “A National Income estimate measures the volume of commodities and services turned out during a given period, counted without duplication.”

Thus, a total national income measures the flow of goods and services in an economy. National Income is a flow and not a stock. It measures the productive power of an economy in a given period to turn out goods and services for the satisfaction of human wants.

Pre-independence Period Estimates

Before Independence, no attempts were made by the government to estimate the national income in a systematic manner. However, several individual attempts were made in this direction. Notable among the estimators were: Dada Bhai Naoroji (1868), William Digby (1899), Findlay Shirras (1911, 1922, and 1931), Shah and Khambatta (1921), V. K. R. V. Rao (1925-29 and 1931-32) and R. C. Desai (1931-40).

Among all these pre-independence estimates of national income, the estimates of Naoroji, Shirras, Shaw, and Khambatta have estimated the value of the output of the agricultural sector and then added a certain percentage as the income of the non-agricultural sector. These estimates, however, were arbitrary in nature and did not have any scientific basis at all.

Dr. V. K. R.V.Rao made use of a combination of the census of output and census of income methods. He divided the economy of India into two categories. The second category included industry, trade, transport, public services and administration, professions, liberal arts, and domestic service. For these occupations, the census of income method was used. The first category included agriculture, pastures, mines, forests, fishing, and hunting. The output method was to be used to evaluate the product derived from these sectors.

To these two sub-totals was added the income from House property and other items which could not be covered under the above categories. From the gross aggregate income so obtained were excluded the values of goods and services consumed in the process of production. By adding the net income earned from abroad, an estimate of national income was made.

R. Hics, M. Mukherjee, and S. K. Ghosh have calculated the rates of growth of per capita income for the period 1860-1945 at 1970-71 prices. Their findings are as under:

Obviously, the Indian economy during the British period presents a picture of near-stagnation over a long period with a growth rate of 0.5 percent from 1860-1945. Hicks and others concluded: “The low growth rate during the pre-independence year seems to owe its origin to the decline in per capita income between 1885 and 1905 and between 1925 and 1950. Occasional periods of stagnation are noticeable, for instance, the periods 1860 to 1865 and 1930 to 1935 and 1945 to 1951, etc.” (BCom National Income of India Notes Study Material)

Post-Independence Period Estimates

After Independence, the Government of India appointed the National Income Committee in August 1949, Mr. P. C. Mahalanobis was the Chairman, and Dr. R. Godgil and V. K. R. V.Rao are members of this committee. The final report of the National Income Committee appeared in 1954. The report was a landmark in the history of this country because, for the first time, it provided comprehensive data on the national income for the whole of India. (BCom National Income of India Notes Study Material)

The principal features of the National Income Committee report were as under:

1. During 1950-51, agriculture which also include animal husbandry, forestry, and fisheries contributed nearly half of the national income.
2. Mining, manufacturing, and hand trades contributed about one-sixth of the total income.
3. Commerce, transport, and communications accounted for a little more than one-sixth of the total national income.
4. Other services such as professionals and liberal arts, administrative services, domestic services, and house property accounted for about 15 percent of national income. (BCom National Income of India Notes Study Material)
5. The share of commodity production was about two-thirds of the national income. The term commodity production includes material production derived from agriculture, mining, factory establishments, hand trades, etc.
6. Services accounted for about one-third of total national income. The service sector includes commerce, transport and communications, administrative services, domestic services, etc. (BCom National Income of India Notes Study Material)
7. The share of the government sector in the net domestic product was 7.6 percent in 1950-51. Along with it, the share of the government in national expenditure was 8.2 percent. (BCom National Income of India Notes Study Material)
8. The margin of error in the calculation of national income estimates worked out at about 10 percent.

MEASUREMENT OF NATIONAL INCOME

There are three main methods of measuring the National Income of a country. These methods are as follows:

1. Product or Value Added Method: Under this method, the money value of all goods and services produced in an economy during a specific period of time usually one year is calculated. The money value is calculated at market price. The sub-total is called the GNP at market prices.

So, GNP = Total Govt. Production + Total Private Business Output

In other words, the GNP is the aggregate value of the current production of goods and services to the government, the consumers, and to businesses. Then, GNP=Govt. Production and Purchase of Goods and Services + Private Gross

Capital Formation + Consumers’ Purchase of Goods and Services. The GNP, less the replacements, is called the net national product or the NNP. The deduction for replacement is equivalent to depreciation in accounting terms.

Net National Product (NNP) = GNP – Depreciation.

2. Income Method: It is also called as income received method. Under this method, all incomes from employment and ownership of assets before taxation received from productive activities be counted. This method consists in finding out the net income received by individual and business enterprises in the country during a year and adding them up. Various sectors like small enterprises, commerce, transport and communication, banking and insurance, liberal arts, domestic activities, house property, public authorities, and the rest of the world are estimated by the Income Method. (BCom National Income of India Notes Study Material)

By adding up the contribution of all sectors to national income, an estimate of the net domestic product at factor cost is obtained. To this is added the new come from abroad and net interest taxes to arrive at the estimate of net income at current prices. This estimate is deflated at the prices base year chosen to obtain a series of national income at constant prices.

3. Total Expenditure Method: It is also called as Consumption Saw Method. Under this method, the total expenditure of the community on consumption plus the aggregate saving must be equal to the community’s total income.

So that,

Total Income = Total Expenditure on Consumption + The Total Amount of Savings during the period under consideration

In this method, the flow of expenditure in an economy is summed up in order to measure the national income. The above expenditure basically includes private consumption, private investment, public investment, changes in stock, and net investment abroad.

In India the Central Statistical Organisation (CSO) is responsible for national estimates of income and the combination of product and income approach method is adopted to measure the national income. (BCom National Income of India Notes Study Material)

Trends of National Income during Planning Period

The following Table shows the growth rates of national income during different five-year plans in the post-independence era.

From the above table, it is revealed that the rate of increase in national income had always been very slow. During the first plan, the annual average growth rate of GNP was 3.7% that of Net National Income was 4.2% and that of per capita income was 2.4%. In the Second Plan, Gross National Income had a growth rate of 4.2% whereas Net National Income and per Capita Income had 4.2% and 2.2% growth rates. During Annual Plan (1979-80), there was a negative growth rate. (BCom National Income of India Notes Study Material)

During Sixth Plan (1980-85), the economy started picking up and the annual growth rates showed signs of improvement with 5.4% of Gross National Income and Net National Income. During Eighth Plan (1992-97), the growth rates of GNP, NNP, and per capita income increased to 6.6%, 6.7%, and 4.6% respectively. (BCom National Income of India Notes Study Material)

During Ninth Plan, the growth rates of GNP, NNP, and per capita income declined to 5.7%, 5.5%, and 3.6% respectively, but in Eleventh Plan (2007-12) the growth rates bounced back to the highest level of 8%. 7.8% and 6.3% respectively. In Eleventh Planning period is a period of global slowdown, with 8% growth in Gross National Income was satisfactory growth in comparison to the expected growth rate (8.6%) in national income. (BCom National Income of India Notes Study Material)

CAUSES OF SLOW GROWTH OF NATIONAL INCOME IN INDIA

The slow growth rate of national income of India during the post-independence period was caused by the following factors:

1. Excessive Dependence on Agriculture Sector: India’s 70 percent population lives in rural areas and they depend on agriculture. But in national income, 26.1% is contributed by the agricultural sector because of orthodox methods of production, lack of financial support, the problem of storage of agricultural produces, etc. (BCom National Income of India Notes Study Material)
2. Unequal Distribution of Income and Poor Standard of Living: In India, there is an unequal distribution of income and the standard of living, the majority of the population is very poor. Human development report 1994 shows that in 1993, the richest 20% of the population shared 84.7% of the total income and the poorest 80% of the total population shared only 1.4% of the total income of the country.
3. Poor Industrial Development: Another important cause behind the slow growth of the National Income of India is the poor rate of development of National Income. During the different planning periods, we have excessively focused on the development of Industry but it has failed to maintain a sustainable growth rate. Hence, it has resulted in poor growth of national income.
4. Lack of Capital: India is facing capital deficiency since the independence period. For infrastructural development, the establishment of industry, transport, communication, etc. there is a huge requirement for working capital.
5. Growth of Population: High growth rate of the population has affected the savings and investment of India very badly. The problem of population is the main cause of low per capita income and the slow growth rate of national income in India.
6. Lack of Skilled Labour: In India, the large population of labor is unskilled. There is no proper facility to educate the labor force and training for the respective industrial fields. So, the result is low productivity and a slow growth rate of national income.
7. Poor Development of Infrastructural Facilities: Poor development of infrastructural facilities like transport, means of communication, power generation, banking facilities, etc., are the major causes of the low growth rate of the industry and agricultural sector. Thus, with low productivity, the growth in national income is very slow. (BCom National Income of India Notes Study Material)
8. Under Utilization of Natural and Human Resources: In India, due to unsatisfactory technological advancement and professional incompetency, natural and human resources have not been utilized to the optimum use. This leads to low production and higher cost.

SUGGESTIONS TO RAISE NATIONAL INCOME IN INDIA

Following are the important suggestions to raise the national income of India:

1. To adopt scientific methods of cultivation.
2. To improve infrastructural facilities.
3. Through the increase in the rate of investment.
4. The higher growth rate of industrial development.
5. Through balanced sectoral growth.
6. Proper utilization of resources.
7. Upgradation in technology.
8. Human capital formation through proper education, employment, and training.
9. Social equity through equitable distribution of income and wealth.
10. Economic liberalization with liberal government policies to eliminate unnecessary hurdles in the path of development.
11. Development of foreign trade.
12. Minimizing the growth rate of the population through proper education and awareness.

BCom National Income of India Notes Study Material

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