Download GDP by Expenditure

GDP by Expenditure
Growth in India’s national income is most often tracked through the Gross Domestic Product (GDP), which is
estimated on a quarterly basis by India’s Central Statistical Organisation (CSO). The CSO releases GDP
through two methods, each of which throws light on different aspects of the economy. One of these methods
is GDP estimation through the expenditure method.
What is GDP defined by expenditure method? How is it different from GDP by any other
method?
GDP as defined by the expenditure method consider the end use of incomes generated on expenditure and
investments. It is distinct from GDP estimated by economic activity, where the economy is divided into
segments like agriculture, industry and services and GDP is estimated by measuring the value added at each
stage of the production process.
What are the components of GDP by the expenditure method?
GDP as measured through the expenditure method is the sum of Private Final Consumption Expenditure
(PFCE), Government Final Consumption Expenditure (GFCE), Gross Fixed Capital Formation (GFCF),
Change in stocks or inventories, Valuables and the Net Exports (NX).
PFCE comprises of consumption expenditure made by consumer households and private non-profit
institutions on both goods and services. GFCE is, as the name suggests, expenditure incurred by the
government on goods and services to enable provision of services by government administrative departments
less government sales. GFCF measures the addition of fixed assets through expenditure on construction,
purchase of machinery and equipment and software. Change in stocks refers to inventories like raw material,
semi-finished goods and finished goods with producers maintained in the course of the production process.
Valuables refer to expenditure on precious items like gold, gems and precious ornaments. Net exports simply
measure the difference between the value of exports and the value of imports.
What is the significance of consumption expenditure in GDP?
Consumption expenditure forms the largest part of GDP, accounting for around 70% of the total in the second
quarter (Q2) of 2013-14. Of this, private final consumption expenditure is the big part, with 59.8% share in
GDP while GFCE accounts for around 10.3%. However, the share of consumption expenditure has declined
marginally with both PFCE and GFCE declining in comparison with the previous quarter (60.6% and 11.9%
respectively) as well as over the corresponding period of the previous year (61.8% and 11% respectively). The
decline in proportion of PFCE could be explained to some extent of lack lustre growth in consumer
expenditure, which is in line with overall softening in economic growth and hence personal incomes as well as
continued elevated inflation levels, which are eating into household budgets. The declining proportion of GFCE
in total GDP is partly on account of a shrinking in this component during Q2 in comparison with Q2 of last
year and partly due to better growth trends in other segments.
What are the trends in other components of GDP by the expenditure method?
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After PFCE, GFCF is the single largest component of GDP by expenditure method, accounting for 33.6% of the
total (as per Q2 2013-14 figures), which has gained in terms of proportion as per the latest data from the
previous quarter (it was contributing 32.6% to overall GDP in Q1 2013-14), though it is still down from the
corresponding period of the previous year (when it contributed 34.6%). This is also an important segment of
GDP, since it shows how much a country’s investing. For a large growing economy like India, there is need for
constant investments, to ensure that it remains de-bottlenecked for further growth since adequate funding is
required to support growth of business. Therefore, it is a positive that it has contributed more to GDP in Q2
than in Q1, and this is at least partly due to a small pickup in growth over the corresponding period of the
previous year of 2.6% after a shrinking of 1.2% witnessed during Q1.
Change in stocks is a small part of GDP by the expenditure method, accounting for a share of 2.5% in GDP in
Q2, a share that has changed little from either the previous quarter or the corresponding period of the previous
year. Similarly, valuables also represent a small proportion of GDP with a share of 2.5% as per the latest figures.
However, it has shown some fluctuations in contribution to GDP, with the share dropping from 4% during the
previous quarter. India’s net exports, are always a deduction from the overall GDP, on account of smaller
exports than imports. In Q2, however, the deduction was somewhat smaller than during the previous quarter,
reflecting a rebound in exports even as imports remained subdued.
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Zephyr Financial Publishers Pvt Ltd.
Registered Office: 13/701 NRI Complex, Nerul, Navi Mumbai - 400706. Mobile: +919819770641 E-mail: [email protected]