National Income Accounting - Methods and Issues for UPSC

Three methods

Economists use three complementary methods to arrive at the same figure for national income: the output method, the income method and the expenditure method. These methods are equal by definition because the value of what is produced must equal the income earned from that production and also equal the spending on final goods and services. Understanding each approach is important because UPSC questions often test the underlying logic and the formulae involved.

Output (or value‑added) method

The output method, also called the product or value‑added approach, measures national income by summing up the value added by every producing unit. It classifies the economy into primary, secondary and tertiary sectors and calculates the gross value of output for each. From this gross output the value of intermediate goods used during production is subtracted to derive the Gross Value Added (GVA). GVA at basic prices is then adjusted by adding product taxes and subtracting product subsidies to obtain Gross Domestic Product (GDP) at market prices. The key steps are:

• List all producing units by sector and obtain their gross output.
• Subtract intermediate consumption to avoid double counting; this yields value added.
• Sum the value added across sectors to get GVA at basic prices.
• Add indirect taxes and subtract subsidies on products to convert GVA to GDP at market prices.

This method highlights the supply side of the economy and is particularly useful in analysing sectoral contributions. In the Indian context, GVA allows us to see how much agriculture, manufacturing, construction, trade and services each add to the economy. For example, in FY 2024‑25 India’s real GVA at 2011‑12 prices was estimated at around ₹171.9 lakh crore, while nominal GVA reached about ₹300.2 lakh crore.

Income method

The income method calculates national income by summing all factor incomes generated in the production process. These include wages and salaries paid to labour, rents from land, interest on capital, and profits (including dividends) earned by businesses. For self‑employed individuals such as shopkeepers or small farmers, their earnings are recorded as mixed income because it includes returns to both labour and capital. The steps in this approach are:

• Identify all income‑earning factors of production.
• Add wages and salaries paid to employees, including allowances and bonuses.
• Include rent, royalty or leasing income from property and natural resources.
• Add interest paid by firms and governments on loans.
• Add profits and dividends distributed by companies, plus retained earnings.
• Add mixed income of self‑employed persons.
• Add employer contributions to social security and pensions, if any.
• Sum these incomes to get Net Domestic Product (NDP) at factor cost. Adjust for depreciation and net factor income from abroad to arrive at Net National Income (NNI).

This method emphasises the distribution side of national income – who receives what portion of the pie. It is useful for analysing income inequality, labour’s share of output and the returns to capital. However, it requires reliable data on wages, profits, rents and interest, which can be challenging in economies with large informal sectors.

Expenditure method

The expenditure method measures national income by totaling all final expenditures made on the country’s output. It assumes that whatever is produced is either consumed, invested, bought by the government or exported. The formula is expressed as:

GDP = C + I + G + (X − M)

where:

• C (private final consumption expenditure) represents household spending on goods and services such as food, clothing, transport and education. In India consumption accounts for more than half of GDP.
• I (gross capital formation) includes investment in fixed assets like machinery, buildings and infrastructure as well as changes in inventories.
• G (government final consumption expenditure) covers government spending on education, health, defence and administration but excludes transfer payments like pensions.
• X − M is the net export component, equal to exports of goods and services minus imports. A positive value means the country sells more abroad than it buys; a negative value indicates a trade deficit.

Using the expenditure method helps policymakers understand the demand side of the economy. For example, the National Statistical Office noted that private consumption grew around 7.2 % in FY 2024‑25, while gross fixed capital formation grew by about 7.1 %, signalling strong domestic demand. The method also allows quick estimation of how changes in consumption or investment would affect overall output.

Comparison of the three methods

The three methods are theoretically equal because they measure the same economic activity from different perspectives. The table below summarises their key features, formulae and typical data sources.

If properly measured, all three approaches yield the same GDP because production generates income and is purchased by someone. This identity is central to macroeconomic analysis and features regularly in UPSC questions. For further reading on how GDP compares with related aggregates like GNP, NNP and GVA, see our guides on GDP calculation methods and GNP, GNI and NNP differences.

Precautions & double counting

While using any of the above methods, accountants must avoid double counting and follow specific precautions to ensure accuracy:

• Exclude intermediate goods: Only final goods and services should be counted. Intermediate goods such as raw materials or components are subtracted in the value‑added method to avoid counting the same value twice.
• Self‑consumed output: Subsistence farming, backyard poultry and home‑produced goods should be valued and included because they add to welfare even if not sold. Surveys often estimate these values.
• Second‑hand goods: Sales of second‑hand cars, houses or furniture are excluded because their value was already recorded when first sold. Broker commissions on these transactions are included as they represent current services.
• Exclusion of transfer payments: Pensions, scholarships, donations and remittances are transfers of income, not payments for goods or services. They are excluded in the income and expenditure methods.
• Capital gains and financial transactions: Profits from the sale of shares or bonds are not counted in GDP as they reflect ownership transfers, not new production.
• Illegal and unreported activities: Black economy transactions and unregistered businesses may escape accounting. Estimating their size remains a challenge.

By adhering to these precautions the accounts provide a fair picture of economic output and avoid artificially inflating or deflating the figures. In exam questions, UPSC often asks candidates to identify which items should be included or excluded.

Informal sector

India has a large informal or unorganised sector that employs nearly half of the workforce and contributes a significant share to GDP. This sector includes street vendors, small retailers, artisans, agricultural labourers and household enterprises. Because many of these activities are not registered and transactions are often cash based, gathering accurate data is difficult.

The challenges posed by the informal sector include:

• Lack of records: Many small units do not maintain formal accounts, making it hard to estimate their value added or incomes.
• Irregular surveys: Sample surveys like the National Sample Survey’s informal sector modules or PLFS provide periodic estimates, but they may not capture rapid changes such as growth of gig‑economy jobs.
• Under‑reporting: To avoid taxes or regulation, informal firms may understate their output or wages.
• Women’s unpaid labour: Household chores and care work, often performed by women, are excluded from national income because they do not involve market transactions. This undervalues women’s contribution and welfare.

Despite these issues, national income accounting tries to incorporate informal activities through sample surveys and indirect estimates. As digital payments and goods and services tax (GST) filings become more common, the gap between formal and informal coverage is gradually narrowing. UPSC aspirants should remember that informal sector challenges are a major reason why national income data may underestimate true economic activity.

Base year & rebasing

A base year is a year whose prices are used as the reference to measure real GDP. Real GDP at constant prices shows changes in production by holding prices constant, whereas nominal GDP at current prices reflects both quantity and price changes. Choosing a recent base year ensures that the price structure is representative of current consumption patterns and technology.

India currently uses 2011‑12 as the base year for GDP, GVA and other national accounts. The base year is revised periodically to reflect changes in the economy such as the rise of services, digital platforms and renewable energy. According to the National Statistical Office, the next base year revision will shift to 2022‑23. New GDP, Consumer Price Index (CPI) and Index of Industrial Production (IIP) series using this base are scheduled for release in early 2026. The revision will integrate data from GST filings, e‑VAHAN vehicle registration, digital payment systems like UPI and new household consumption surveys. For CPI, the item basket will increase to more than 350 products and use weights from the 2023‑24 Household Consumption Expenditure Survey.

Rebasing has several benefits and caveats:

• Reflects new sectors: Sectors like digital services, gig work and renewable energy did not exist or were small in earlier base years. The revised base will capture their growing importance.
• Aligns with international standards: Periodic rebasing brings India’s accounts in line with the United Nations System of National Accounts (SNA). Developed economies update their base every five years; India does it roughly every decade.
• Ensures comparability: When the base year changes, the entire time series is re‑estimated so that growth rates remain comparable across years. Old series based on outdated prices can exaggerate or understate growth.
• Requires communication: Shifts in base year can temporarily alter growth rates, leading to public debate. It is important to communicate the methodology and reasons to avoid confusion.

For more on inflation measures and how they relate to GDP deflators, see our article on GDP deflator vs CPI vs WPI.

Data sources (MOSPI)

National income statistics are only as good as the data that feed into them. The NSO uses a combination of administrative records, surveys and technological platforms to compile GDP and related aggregates. Key sources include:

• Administrative data: GST returns, income tax filings, corporate filings under the Ministry of Corporate Affairs (MCA21), vehicle registrations and banking statistics from the Reserve Bank of India provide high‑frequency data on production and transactions.
• Annual Survey of Industries (ASI): Captures output, employment and value added in the organised manufacturing sector.
• Economic Census and Enterprise surveys: Enumerate establishments across all sectors, including micro, small and medium enterprises.
• National Sample Survey (NSS): Surveys households and enterprises on consumption, employment, informal sector activity and services. The Periodic Labour Force Survey (PLFS) and Household Consumption Expenditure Survey (HCES) are part of the NSS system.
• Agricultural statistics: Data on crop production, livestock, fisheries and horticulture from the Ministry of Agriculture and Farmers’ Welfare form the backbone of primary sector estimates.
• Financial data: Balance sheets and profit statements from banks, insurance companies and non‑banking financial companies are used to estimate the financial sector’s value added.
• Digital sources: Growing use of electronic toll systems, remote sensing for crop estimation and digital payment platforms like UPI help capture real‑time transactions that were previously hard to track.

Despite such wide‑ranging sources, data gaps remain, especially for informal services and household enterprises. Regular updates, sample surveys and triangulation of multiple sources are therefore essential. Aspirants should note that the NSO releases Provisional Estimates of GDP by May each year, which are revised when more complete data become available.

For UPSC Prelims

• Memorise the three methods of measuring national income and their formulae.
• Know which items are excluded (intermediate goods, second‑hand goods, transfer payments, capital gains).
• Remember key aggregates: GDP, GVA, GNI, NNI and per capita NNI; India’s per capita NNI for 2024‑25 at current prices is around ₹2.05 lakh and about ₹1.15 lakh at constant prices.
• Understand the meaning of base year and the current base year (2011‑12) with the planned shift to 2022‑23.
• Be aware of the differences between market price and factor cost, and between nominal and real values.
• Know the major data sources like ASI, NSS, GST, MCA21 and PLFS.

For UPSC Mains

• Discuss the limitations of national income accounting in capturing informal sector activity, unpaid work and environmental costs.
• Analyse how frequent rebasing can change growth perceptions and compare India’s practice with other countries.
• Explain the policy implications of high consumption growth versus investment growth for sustainable development.
• Critically evaluate the reliability of survey‑based data and suggest ways to improve data quality using technology.
• Link national income statistics with welfare measures such as inequality indices, HDI and green GDP.
• Illustrate how national income data informs fiscal policy, monetary policy and poverty alleviation programmes.

Quick facts

• FY 2024‑25 GDP (real): About ₹187.97 lakh crore at constant 2011‑12 prices, registering 6.5 % growth.
• FY 2024‑25 GDP (nominal): Around ₹330.68 lakh crore, a growth of 9.8 % over 2023‑24.
• Real GVA: Estimated at ₹171.87 lakh crore in 2024‑25, with services contributing over 55 % of value added.
• Per capita NNI (current price): Approximately ₹205,000 for 2024‑25; in real terms (2011‑12 prices) about ₹114,710.
• Informal sector share: Roughly 45–50 % of India’s economic activity occurs outside the formal sector.
• Current base year: 2011‑12; new base year 2022‑23 to be adopted in 2026.
• Data release schedule: NSO releases First Advance Estimates in January, Provisional Estimates in May and Revised Estimates in subsequent years.
• Unemployment survey: Periodic Labour Force Survey (PLFS) provides employment data that feed into income estimates.

UPSC Previous Year Questions (Selected)

1. Which of the following best describes the base year in national income accounting?
   (a) The year whose income is used to calculate nominal GDP.
   (b) The year whose prices are used to calculate real GDP.
   (c) The year whose income is used to calculate real GDP.
   (d) The year whose prices are used to calculate nominal GDP.
   Answer: (b) The base year is the year whose prices are used to calculate real GDP, allowing comparison by removing inflation. India currently uses 2011‑12 as the base year.
2. In an open economy, national income (Y) is equal to:
   (a) C + I + G + X
   (b) C + I + G − X + M
   (c) C + I + G + (X − M)
   (d) C + I − G + X − M
   Answer: (c) In the expenditure method, Y = C + I + G + (X − M), where X is exports and M is imports.
3. Which of the following is not a method for calculating GDP?
   (a) Product or value‑added method
   (b) Diminishing cost method
   (c) Income method
   (d) Expenditure method
   Answer: (b) The diminishing cost method is not used. GDP can be calculated using the product, income or expenditure approach.
4. One of the major problems in calculating national income in India is:
   (a) Underemployment
   (b) Inflation
   (c) Low level of savings
   (d) Non‑organised sector
   Answer: (d) A large non‑organised or informal sector makes accurate measurement difficult.

Practice MCQs

1. India’s per capita net national income (NNI) at constant 2011‑12 prices for FY 2024‑25 is closest to:
   A. ₹96,000
   B. ₹1,14,700
   C. ₹1,25,900
   D. ₹2,05,300
2. The value‑added method calculates national income by:
   A. Summing all final expenditures on goods and services
   B. Adding wages, rents, interest and profits
   C. Subtracting intermediate consumption from the value of output across sectors
   D. Adding imports and subtracting exports
3. Which of the following items is excluded from GDP calculations?
   A. Brokerage fee for selling an old car
   B. Construction of a new school building
   C. Purchase of a machine by a factory
   D. Sale of a second‑hand television without brokerage
4. When the base year for national accounts is updated, which of the following is likely to happen?
   A. The price structure used for real GDP calculations becomes older.
   B. New sectors and digital activities may be incorporated.
   C. Growth rates become incomparable across years.
   D. Nominal GDP values are revised downward.
5. Which survey provides household consumption data that will be used to update the weights in India’s CPI basket?
   A. Annual Survey of Industries (ASI)
   B. Periodic Labour Force Survey (PLFS)
   C. Household Consumption Expenditure Survey (HCES) 2023‑24
   D. Economic Census 2024

Answer key: 1‑B, 2‑C, 3‑D, 4‑B, 5‑C.

Frequently asked questions

For related topics, explore our notes on inflation and CPI, the distinction between economic growth and development, and environmental metrics like green GDP. These links will help integrate concepts across the Indian economy syllabus.