1.
Explain the value-added, income and expenditure methods of estimating national
income.
Approach:
Briefly explain the concept of national income.
Explain the value added, income and expenditure methods of estimating national income.
Conclude with a brief note on the methods employed in India.
Answer:
National Income refers to the money value of all the goods and services produced in a country
during a financial year. It is generally calculated in terms of GDP or GNP at factor cost (i.e. costs of
all the factors of production) or at market price (which includes cost of production, indirect taxes
and subsidies for the producers). The national income can be estimated by various methods like
value-added method, income method and expenditure method.
Value-added method: Also known as product method or inventory method, it consists of finding
out the market value of all the goods and services produced in a country during a given
period. The value of intermediate products consumed for production of final goods is deducted so
that doubling of values is eliminated. The value of depreciation of equipments during the process of
production and indirect taxes is also deducted. The total of the estimates gives us net domestic
product at factor cost classified by industrial origin. The addition of net income from abroad to this
gives us net national income at factor cost.
NNPFC = GDPMP – consumption of fixed capital (Depreciation) + Net Factor Income from
Abroad – Net indirect Tax
where, NNPFC = Net National Product at Factor Cost, GDPMP = Gross Domestic Product at
Market Prices
Income method: This method consists of adding together all the income that accrues to the factors
of production i.e. human labour, capital, fixed natural resources (land) and entrepreneurship by
way of wages, interest, rents, and profits respectively during a given period. National income is net
domestic factor income added with net factor income from abroad.
NNPFC = NDPFC + Net Factor Income from Abroad.
Where, NDPFC = Net Domestic Product at Factor Cost
Expenditure method: In this method, the total sum of expenditure on the purchase of final goods
and services produced during an accounting year within an economy is estimated to obtain the
values of national income. The expenditure may be classified into four categories viz. Private final
consumption expenditure, Government final consumption expenditure, Investment expenditure or
gross domestic capital formation, and Net exports (exports – imports).
GDPMP = Private final consumption expenditure + Government final consumption
expenditure + Investment expenditure + Net exports (exports – imports).
NNPFC= GDPMP – Depreciation + Net Factor Income from Abroad-Net Indirect Tax
In India, there is varied use of these methods to calculate the national income. The CSO calculates
value addition done through activities like agriculture, forestry, fishing, mining & manufacturing,
construction etc. using the value-added method. Under expenditure method, the CSO adds up
various components of expenditure i.e. Private Final Consumption, Government Final Consumption,
Gross Fixed Capital Formation, Net of Exports and Imports.
- Explain why Micro, Small and Medium Enterprises (MSME) sector is regarded as the ‘growth
engine’ of the Indian economy. Suggest key reforms that are required for improving the overall
business climate for MSMEs in India.
Approach:
Highlight the reasons as to why MSME sector is considered as the growth engine of Indian
economy.
Briefly mention the issues facing this sector.
Suggest reform measures for improving the overall business climate for MSME sector in India.
Answer:
With a vast network of about 63.38 million enterprises, MSME sector contributes to about 45% of
manufacturing output, more than 40% of exports and over 28% of GDP. Besides, MSMEs create
employment for about 111 million people. The sector produces a wide range of products, from
simple consumer goods to high-precision, sophisticated finished products. It has also been
contributing significantly to the expansion of entrepreneurial base through business innovations.
Due to its tremendous multiplier impact on economic growth, and its forward and backward
linkages with industry, it is rightly considered the growth engine of Indian economy.
However, MSMEs in India face a lot of constraints such as high cost of credit; low access to new
technology and marketing; poor access to international markets; lack of skilled manpower;
inadequate infrastructure and regulatory issues related to taxation, labour laws and environment.
In this regard, the following key reforms, as discussed in the UK Sinha Committee report, are
needed to improve the business climate for MSMEs:
Addressing the cumbersome registration process and promote use of Unique Enterprise
Identifier (UEI) like PAN for purposes like procurement, availing government sponsored
benefits, etc.
Establishing Enterprise Development Centers (EDCs) in each district for capacity building of
entrepreneurs.
MSME clusters should collaborate with companies having innovation infrastructure, R&D
institutions and universities.
Considering their vulnerability and size, insolvency code / delegated legislation should provide
for out-of-court assistance such as mediation, debt counseling etc. to MSMEs.
Creation of a Digital Public Infrastructure to reduce loan-operating costs significantly and also
address information asymmetry that improves credit access.
Creation of a National Council for MSMEs to facilitate coherent policy outlook and uniform
monitoring.
The MSMED Act, 2006 should be amended and its focus should be towards market facilitation
and ease of doing business.
It must be ensured that MSMEs come to terms with the ongoing structural changes in the economy
(like GST) and fully benefit from advances in digitization. This shall also substantially reduce the
cost and time for this sector and enhance its ease of doing business.
