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Net National Product (NNP) of an economy is the GNP after deducting the loss due to ‘depreciation’. The formula to derive it may be written like:
NNP = GNP – Depreciation
or,
NNP = GDP + Income from Abroad – Depreciation.
The different uses of the concept of NNP are as given below:
(i) This is the ‘National Income’ (NI) of an economy. Though, the GDP, NDP and GNP, all are ‘national income’ they are not written with capitalised ‘N’ and ‘I’.
(ii) This is the purest form of the income of a nation.
(iii) When we divide NNP by the total population of a nation we get the ‘per capita income’ (PCI) of that nation, i.e., ‘income per head per year’. A very basic point should be noted here that this is the point where the rates of dipreciation followed by different nations make a difference. Higher the rates of depreciation lower the PCI of the nation (whatever be the reason for it logical or artificial as in the case of depreciation being used as a tool of policymaking). Though, economies are free to fix any rate of depreciation for different assets, the rates fixed by them make difference when the NI of the nations are compared by the international financial institutions like the IMF, WB, ADB, etc.
The ‘Base Year’ together with the ‘Methodology’ for calculating the National Accounts were revised by the Central Statistics Office (CSO) in January 2015, which is given in the forthcoming pages.
Cost and Price of National Income
While calculating national income the issues related to ‘cost’ and ‘price’ also needs to be decided. Basically, there are two sets of costs and prices; and an economy needs to choose at which of the two costs and two prices it will calculate its national income. Let us understand the confusion and the relevance of this confusion.14
(i) Cost: Income of an economy, i.e., value of its total produced goods and services may be calculated at either the ‘factor cost’ or the ‘market cost’. What is the difference between them? Basically, ‘factor cost’ is the ‘input cost’ the producer has to incur in the process of producing something (such as cost of capital, i.e., interest on loans, raw materials, labour, rent, power, etc.). This is also termed as ‘factory price’ or ‘production cost/price’. This is nothing but ‘price’ of the commodity from the producer’s side. While the ‘market cost’ is derived after adding the indirect taxes to the factor cost of the product, it means the cost at
which the goods reach the market, i.e., showrooms (these are the cenvat/central excise and the CST which are paid by the producers to the central government in India). This is also known as the ‘ex-factory price’. The weight of the state taxes are then added to it, to finally derive the ‘market cost’. In general, they are also called ‘factor price’ and ‘market price’.
India officially used to calculate its national income at factor cost (though the data at market cost was also released which were used for other purposes by the governments, commerce and industry). Since January 2015, the CSO has switched over to calculating it at market price (i.e., market cost). The market price is calculated by adding the product taxes (generally taken as the indirect taxes of the Centre and the States) to the factor cost. This way India has not switched over the popular international practice. Once the proposed GST gets implemented it will be easier for India to calculate its national income at market price.
(ii) Price: Income can be derived at two prices, constant and current. The difference in the constant and current prices is only that of the impact of inflation. Inflation is considered stand still at a year of the past (this year of the past is also known as the ‘base year’) in the case of the constant price, while in the current price, present day inflation is added. Current price is, basically, the maximum retail price (MRP) which we see printed on the goods selling in the market.
As per the new guidelines the base year in India has been revised from 2004–05 to 2011–12 (January 2015). India calculates its national income at constant prices—so is the situation among other developing economies, while the developed nations calculate it at the current prices. Though, for statistical purposes the CSO also releases the national income data at current prices. Why? Basically, inflation has been a challenging aspect of policymaking in India because of its level (i.e., range in which it dwindles) and stability (how stable it has been). In such situations growth in the income levels of the population living below the poverty level (BPL) can never be measured accurately (due to higher inflation the section will show higher income) and the government will never be able to measure the real impact of its poverty alleviation programmes.
Here, one important aspect of income needs to be understood. Income of a person has three forms—the first form is nominal income (the wage someone gets in hand per day or per month), the second form is real income (this is nominal income minus the present day rate of inflation—adjusted in percentage form), and the last one is the disposable income (the net part of wage one is free to use which is derived after deducting the direct taxes from the real/nominal income, depending upon the need of data). What happens in practice is that while the nominal income might have increased by only 5 per cent, it looks 15 per cent if the inflation is at the 10 per cent level. Unlike India, among the developed nations, inflation has been around 2 per cent for many decades (it means it has been at lower levels and stable, too. This is why the difference between the incomes at constant and current prices among them are narrow and they calculate their national income at current prices. They get more reliable and realistic data of their income).
While accounting/calculating national income the taxes, direct and indirect, collected by the government, needs to be considered. In the case of India, to the extent the direct taxes (individual income tax, corpoarate income tax, i.e., the corporate tax, divident tax, interest tax, etc.) are concerned, there is no need of adjustment whether the national income is accounted at factor cost or market cost. This is so because at both the ‘costs’ they have to be the same; besides these taxes are collected at the income of source of the concerned person or group.
But the amount of indirect taxes (cenvat, customs, central sales tax, sales tax/vat, state excise, etc.) needs to be taken into account if the national income is accounted at ‘factor cost’ (which is the case with India). If the national income is calculated at factor cost then the corpus of the total indirect taxes needs to be deducted from it. This is because, indirect taxes have been added twice: once at the point of the people/group who pay these taxes from their disposable income while purchasing things from the market, and again at the point of the governments (as their income receipts). Collection/source of indirect taxes are the ‘disposable income’ (which individuals and companies have with them after paying their direct taxes—
from which they do any purchasing and finally, the indirect taxes reach the government). Thus, if the national income is calculated at factor cost, the formula to seek it will be:
National Income at Factor Cost = NNP at Market Cost – Indirect Taxes
However, if the national income is being derived at ‘market cost’, the indirect taxes do not need to be deducted from it. In this case, the government do not have to add their income accruing from indirect taxes to the national income. It means, that the confusion in the case of national income accounting at factor cost is only related to indirect taxes.
Similar to the indirect taxes, the various subsidies which are forwarded by the governments need to be adjusted while calculating national income. They are added to the national income at market cost, in the case of India. Subsidies are added in the national income at market cost to derive the national income at factor cost. This is because the price at which subsidised goods and services are made available by the government are not their real factor costs (subsidies are forwarded on the factor costs of the goods and services) otherwise we will have a distorted value (which will be less than its real value). Thus, the formula will be:
National Income at Factor Cost = NNP at Market Cost + Subsidies
If the national income is derived at the market cost and governments forward no subsidies there is no need of adjustments for the subsidies, but after all there is not a single economy in the world today which does not forward subsidies in one or the other form.
Putting ‘indirect taxes’ and ‘subsidies’ together, India’s National Income will thus be derived with the following formula (as India does it at factor cost):
National Income at Factor Cost = NNP at Market Cost – Indirect Taxes + Subsidies