National Income Accounting – Methods and Issues for UPSC

Quick Facts on India’s National Accounts (FY 2024‑25)

• India’s nominal GDP in FY 2024‑25 is provisionally estimated at about ₹330.68 lakh crore, while the real (2011‑12 prices) GDP is around ₹187.97 lakh crore, implying a real growth rate of 6.5% and nominal growth of 9.8% over the previous year.
• Gross Value Added (GVA) at basic prices stands at roughly ₹300.22 lakh crore. Adding net product taxes (indirect taxes minus subsidies) of about ₹30.46 lakh crore gives the GDP at market prices.
• Private Final Consumption Expenditure (PFCE) makes up about 61% of GDP, Government Final Consumption Expenditure around 10%, and Gross Capital Formation (investment) nearly 30%. Net exports are negative because imports exceed exports.
• The informal sector contributes approximately 45% of India’s GDP (FY 2022‑23) and employs a large majority of workers. Estimating its output requires special surveys and new data sources.
• The national accounts series currently uses 2011‑12 as the base year for constant price calculations. A revision to 2022‑23 is underway, with the new series expected to be released in early 2026. The base year for the Consumer Price Index (CPI) will shift to 2024.
• The NSO compiles GDP primarily using the value‑added method sector by sector and cross‑verifies results using the income and expenditure approaches. Administrative data (such as GST and corporate filings) and household surveys (such as the Periodic Labour Force Survey and Household Consumption Expenditure Survey) are increasingly used to improve coverage and accuracy.

Three methods of national income accounting

National income can be estimated in three different but conceptually equivalent ways. In practice, statisticians use all three methods to cross‑check results and ensure consistency.

In India, sectoral GVA is estimated using the value‑added approach for agriculture, industry and services. Income and expenditure methods are used for sectors where reliable production data are unavailable and to reconcile discrepancies across approaches.

Precautions and the problem of double counting

Accurate measurement of national income requires careful selection of items to include and exclude. Counting the same output more than once inflates the estimates and misleads policy.

• Final vs. intermediate goods: Only the value of final goods and services should be counted. Intermediate goods and services that are used as inputs for further production are excluded to avoid double counting. The value‑added method achieves this by subtracting intermediate consumption from gross output.
• Own‑account and unpaid production: Goods produced and consumed within households (for example, food grown for own consumption) should be valued at market prices and included. However, household services (cooking, childcare) not exchanged in the market are excluded because valuing them is difficult.
• Transfer payments and financial transactions: Pensions, scholarships, gifts and remittances are not payments for current production and are excluded. Buying and selling of shares, bonds or second‑hand goods is also excluded because they do not reflect current production.
• Depreciation: The difference between gross and net measures is depreciation of fixed capital. When calculating net domestic or national product, depreciation must be subtracted.
• Illegal and informal activities: Transactions in the black economy and some informal activities are difficult to capture. Statistical agencies attempt to estimate them through surveys and administrative data, but the coverage is imperfect.
• Valuation of inventories: Changes in stocks of goods held by firms are included because production may not match sales. Care is needed to value inventories at current prices.

Double counting can occur if intermediate goods or capital goods are counted along with final goods, or if the same income is recorded under two heads. Using the value‑added concept and following standard accounting rules helps prevent these errors.

The informal sector and measurement challenges

The informal sector comprises unincorporated enterprises and self‑employed individuals that operate outside formal regulations and often do not maintain proper accounts. Examples include street vendors, small shops, domestic workers, gig economy workers and many agricultural households. In India, this sector is large: it contributes roughly 45% of the GDP and employs over 80% of the workforce.

Measuring the output and income of the informal sector poses several challenges:

• Lack of records: Many informal businesses do not keep written accounts, making it difficult to estimate revenues, costs and value added.
• Cash transactions: Transactions are often conducted in cash, outside formal banking channels and tax systems, leaving little audit trail.
• Home‑based and multiple jobs: Workers may engage in several activities simultaneously (such as farming and weaving), complicating the separation of each activity’s contribution.
• Non‑monetised output: A portion of output is consumed by producers themselves (for example, farm produce), which must be estimated using sample surveys.
• Changing nature of work: Digital platforms, social media influencers and gig work blur the boundaries between formal and informal activities, requiring new data sources.

To improve measurement of informality, the NSO conducts specialised surveys such as the Annual Survey of Unincorporated Sector Enterprises (ASUSE) and the Periodic Labour Force Survey (PLFS). Administrative data from the Goods and Services Tax (GST), digital payment systems and e‑commerce platforms are also being explored. According to a consultation organised by MoSPI in January 2025, the informal sector contributed about 45% of GDP in FY 2022‑23 and over 61% of women workers in non‑agriculture sectors were engaged in informal enterprises. Efforts are under way to compile monthly employment statistics and quarterly value added estimates for the unincorporated sector to better capture its contribution.

Base year and rebasing of national accounts

The base year is the reference year used to calculate constant price estimates by removing the effect of inflation. Constant price or “real” GDP values production at the prices prevailing in the base year. Selecting an appropriate base year is important: it should reflect normal economic conditions and a structure similar to the current economy.

India’s national accounts currently use 2011‑12 as the base year. Earlier base years were 2004‑05, 1999‑2000, 1993‑94, 1980‑81 and so on. Revising the base year allows statisticians to:

• Incorporate structural changes in the economy (such as the expansion of services and digital industries).
• Use updated price and quantity data, ensuring that volume measures reflect current consumption patterns.
• Include new datasets (for example, GST returns, corporate filings via the MCA21 portal, and results of economic and unincorporated sector surveys) and improved methodologies.
• Reconcile estimates with international best practices under SNA 2008.

The Ministry of Statistics and Programme Implementation (MoSPI) is currently revising the base year to 2022‑23 for GDP and the Index of Industrial Production (IIP). The new GDP series is scheduled to be released on 27 February 2026. For the Consumer Price Index (CPI), a base year of 2024 is planned, with the revised series expected in 2026. Updating the base year will align India’s statistics with recent economic developments, including the digital economy, gig work and increased formalisation.

Data sources used by the National Statistical Office

The NSO relies on a wide range of data sources to compile national accounts. These include administrative records, surveys, censuses and financial statements:

• Agriculture and allied sectors: Crop area and production statistics from the Department of Agriculture & Farmers Welfare; livestock statistics from the Department of Animal Husbandry; fisheries data from the Department of Fisheries.
• Mining and quarrying: Output and value data from the Indian Bureau of Mines and the Ministry of Petroleum & Natural Gas.
• Manufacturing: The Annual Survey of Industries (ASI), which covers large factories, and the Index of Industrial Production (IIP) provide data on output and value added. Corporate sector information comes from financial statements filed under the MCA21 system and from the Reserve Bank of India (RBI). GST turnover data are increasingly used to capture smaller enterprises.
• Construction: Estimates are based on cement and steel consumption, labour inputs from the Periodic Labour Force Survey and data from state public works departments.
• Trade, hotels and restaurants: Turnover data from GST, surveys of unincorporated enterprises (ASUSE) and information from tourism departments.
• Transport, storage and communication: Administrative statistics from the Railways, Civil Aviation, Road Transport authorities and telecommunications regulators.
• Financial services: Balance sheets and profit & loss accounts of banks and insurance companies from the RBI and the Insurance Regulatory and Development Authority (IRDA).
• Public administration, defence and other services: Government budget documents, municipal accounts and information from autonomous bodies.
• Unincorporated sector surveys: The Annual Survey of Unincorporated Sector Enterprises (ASUSE) and earlier Economic Census results provide data for household‑run businesses and informal activities.
• Labour and wages: The Periodic Labour Force Survey (PLFS) provides employment, unemployment and wage data to derive productivity estimates.
• Household consumption: The Household Consumption Expenditure Survey (HCES) supplies detailed data on spending patterns, essential for the expenditure method and updating CPI weights.
• Price indices: The Wholesale Price Index (WPI) compiled by the Office of the Economic Adviser and the Consumer Price Index (CPI) compiled by NSO are used to deflate current values and derive real series.

By combining these sources and using sample surveys for sectors lacking regular administrative data, the NSO constructs coherent and comprehensive estimates of national income.

UPSC previous year questions (PYQs)

Questions on national income accounting appear frequently in the UPSC prelims and mains. Here are a few examples:

1. Prelims 2021: Which of the following components form part of India’s Gross Domestic Product (GDP) by expenditure method?
   1. Private final consumption expenditure (C)
   2. Investment or gross capital formation (I)
   3. Government final consumption expenditure (G)
   4. Exports minus imports (X – M)
   Answer: All four components (1, 2, 3 and 4) constitute GDP by expenditure method.
2. Prelims 2017: When the income method is used to calculate national income, which of the following are included?
   (a) Wages and salaries paid to employees
   (b) Rent paid on land and buildings
   (c) Interest received on loans and deposits
   (d) Corporate profits and mixed income of self‑employed
   Answer: All of the above are included. Transfer payments such as pensions and scholarships are excluded because they are not payments for current production.
3. Mains 2019 (General Studies III): “Discuss the challenges faced in measuring India’s national income, particularly with reference to the informal sector, and suggest measures to improve accuracy.”
   Guideline: Mention issues like lack of records, cash transactions, mixed occupations and unreported economic activity. Suggest improvements such as expanding surveys, leveraging digital transaction data, developing a statistical business register and revising the base year.

Practice MCQs

Test your understanding of national income accounting with the following questions:

1. Which of the following items are excluded while estimating GDP using the value‑added method?
   (a) Value of intermediate goods
   (b) Salaries of government employees
   (c) Depreciation of machinery
   (d) Net exports
   Answer: (a) Intermediate goods are excluded; only the value added by final goods is counted.
2. In the expenditure method of national income accounting, why are imports subtracted from total expenditure?
   (a) Imports represent savings
   (b) Imports are government revenue
   (c) Imports are not produced domestically and hence should not be part of GDP
   (d) Imports are counted separately under income method
   Answer: (c) Imports are goods and services produced abroad; subtracting them prevents over‑stating domestic production.
3. Which of the following statements about the informal sector in India is correct?
   (a) It accounts for less than 10% of employment
   (b) It contributes zero to GDP as transactions are not recorded
   (c) It contributes a significant share of GDP and employs most workers
   (d) It is fully captured through corporate filings under MCA21
   Answer: (c) The informal sector contributes roughly 45% of GDP and employs the majority of workers. Its measurement is improving but still incomplete.
4. When the base year for national accounts is revised, which of the following is likely to occur?
   (a) The nominal value of GDP automatically increases
   (b) The structure of the economy reflected in the data changes to incorporate new sectors and updated weights
   (c) Depreciation is eliminated from calculations
   (d) GDP at constant prices becomes higher than at current prices
   Answer: (b) Revising the base year incorporates new data sources, changes in economic structure and updated weights, making estimates more representative.
5. Which of the following best describes the Statistical Business Register (SBR) initiative by MoSPI?
   (a) A survey of school enrolment
   (b) A list of all registered and unregistered businesses used to improve sampling and national accounts
   (c) A database of foreign direct investments
   (d) A register of government employees
   Answer: (b) The SBR is a comprehensive list of enterprises that will aid in sampling, surveys and estimation of GDP, especially in the informal sector.

Related topics

• GDP – Gross Domestic Product: Nominal, Real, Per Capita, PPP
• GNP, GNI, NNP, NDP, GVA – Concepts and Differences
• Inflation: CPI, WPI and GDP Deflator
• Economic Growth vs Development