Gajendra Singh Godara
Sep 24, 2025
12
mins read
Gross Domestic Product (GDP) represents the final value of goods and services produced within a country's borders in a specific period, typically a year. The GDP growth rate is a crucial indicator of economic performance, reflecting health, growth, and development.
GDP measures national output and is one of three national income aggregates.
Gross National Product (GNP) differs slightly: it adds net income from abroad to GDP (i.e. output by residents, not just within borders) – in formula form GNP = GDP + (net factor income from abroad).
Another measure is Gross Value Added (GVA), which sums the value added by all sectors. GVA is linked to GDP by:
GDP = GVA + (Taxes on products – Subsidies).
Thus GVA can be viewed as a supply-side measure and GDP as the demand-side total. In practice, GDP and GVA growth often move together. For example, in Q4 of FY 2024-25 India’s GDP grew 7.4% while GVA grew 6.8%, a gap caused by taxes/subsidies. This illustrates how GDP and GVA differ: GDP includes net product taxes, whereas GVA does not.
Types of Gross Domestic Product
GDP is a key economic indicator that tells us how well a country’s economy is doing by measuring the total value of goods and services produced.
Nominal GDP: This shows the value of goods and services at current market prices without adjusting for inflation. It helps compare the size of the economy within the same year but is less useful for comparing across years because prices change over time.
Real GDP: Real GDP adjusts for inflation, giving a more accurate picture of economic growth over time by measuring output at constant prices. It helps us understand the actual increase or decrease in production.
Formula: Real GDP = Nominal GDP ÷ Price DeflatorGDP Per Capita: This breaks down the GDP per person, showing the average income or output by each individual in the country. It is a useful measure to compare living standards and economic wellbeing across countries or time.
Formula: GDP Per Capita = Total GDP ÷ PopulationGDP at Factor Cost vs. Market Prices: India now reports GDP at market prices (which includes taxes minus subsidies on products). GDP at factor cost (also called GVA at basic prices) excludes those taxes/subsidies. The shift to market-price GDP (with sectoral output given as GVA) aligns with international norms.
GDP Growth Rate: This measures how fast the economy is growing by looking at changes in GDP from one period to another. A higher growth rate signals expansion, while a negative rate indicates recession.
GDP Based on Purchasing Power Parity (PPP): PPP adjusts GDP to reflect differences in cost of living and prices between countries. This method allows better comparison of real economic output and living standards, removing distortions caused by exchange rates.
Potential GDP: The economy’s maximum sustainable output if all resources are fully employed without inflation. It is determined by factors like capital stock, labor force and productivity. Potential GDP represents the long-run capacity of the economy
Table of content
Gross Domestic Product (GDP) can be measured using three main approaches, each giving a different perspective on the economy:
Income Method: This method adds up all incomes earned by the factors of production, like wages, rent, and profits, within a country.
Formula: GDP = GDP at factor cost + Taxes – Subsidies.Expenditure Method: It calculates the total money spent on goods and services by households, businesses, government, and foreign buyers.
Formula: GDP = Consumption (C) + Investment (I) + Government Spending (G) + (Exports (X) – Imports (M)).Production (Output) Method
This sums the value of all goods and services produced in the country, measured at constant prices (Real GDP) to remove the effect of inflation.
Formula: GDP = Real GDP (at constant prices) – Taxes + Subsidies.
All three methods, when calculated accurately, give the same GDP figure but focus on income, spending, or production respectively. India uses these methods combined with updated base years and improved statistics to capture an accurate picture of its growing economy.
India’s official GDP figures are computed and published by the National Statistical Office (NSO) under the Ministry of Statistics and Programme Implementation (MoSPI). (The NSO was formed by merging the old CSO and NSSO). Each quarter and year, NSO releases the GDP estimates based on updated data.
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The tax-to-GDP ratio is the share of a country’s tax revenue in its GDP. It is an indicator of the government’s fiscal capacity and revenue mobilisation. Formally, Tax to GDP = (Total Tax Revenue / GDP)×100. A higher ratio means more government revenue relative to the economy’s size, enabling greater public spending on infrastructure and welfare.
In India, the tax-to-GDP ratio is quite low by global standards. It is projected around 11.7% for FY2024-25. (For context, many developed countries have ratios above 25–30%.) India’s low tax ratio is due to factors like a large informal sector, tax exemptions, and compliance issues. This limits the government’s budgetary space.
On the other hand, higher tax-to-GDP ratios in developed countries enable robust public spending on infrastructure, health, and welfare programs, highlighting the need for reforms to boost India's ratio and counteract challenges like slowing growth.
India overhauled its GDP methodology in 2015. Key changes included:
Base Year Update: The base year for GDP calculation was revised from 2004-05 to 2011-12 to better reflect the current economic structure and align with international standards.
Manufacturing Data Sources: Earlier, data came from the Index of Industrial Production (IIP) and Annual Survey of Industries (ASI), covering about 2 lakh factories. After revision, data from MCA 21 was used, including annual accounts from nearly 5 lakh companies, offering a broader and more accurate view.
GDP Calculation Metric: The old method calculated GDP at factor cost. The new method calculates GDP at market prices, including product taxes and subsidies for a more comprehensive measure. Gross Value Added (GVA) at basic prices is now used for sectoral estimates.
Labour Income Estimation: Previously, all labour inputs were treated equally. The updated method introduces “effective labour input,” assigning different weights based on roles such as owner, professional, or helper.
Financial Sector Coverage: Earlier estimates covered only a few mutual funds and non-banking financial entities. The expanded coverage now includes stockbrokers, stock exchanges, asset managers, pension funds, and regulators like SEBI, PFRDA, and IRDA.
Agricultural Value Addition: Before 2015, only farm produce was considered. The revised method also includes value addition from livestock and other agricultural activities.
Macroeconomic variables related to GDP help us understand the economy’s overall performance by looking at production, income, and spending from different angles. Here are the important variables with their meanings and formulas:
GDP at Factor Cost: This shows the total production of goods and services in a country by removing indirect taxes and adding subsidies to GDP at market prices.
Formula: GDP at Factor Cost = GDP at Market Price − Indirect Taxes + SubsidiesNet Domestic Product (NDP) at Factor Cost: NDP reflects the net output after accounting for depreciation (wear and tear of capital assets) from GDP at factor cost.
Formula: NDP at Factor Cost = GDP at Factor Cost − DepreciationGDP at Market Price: This measures GDP based on market prices, including indirect taxes and excluding subsidies. It shows the value of goods and services at current market conditions.
Formula: GDP at Market Price = GDP at Factor Cost + Indirect Taxes − SubsidiesNDP at Market Price: NDP at market price adjusts NDP at factor cost by adding indirect taxes and subtracting subsidies.
Formula: NDP at Market Price = NDP at Factor Cost + Indirect Taxes − SubsidiesGross National Product (GNP) at Factor Cost: GNP adds net income earned from abroad (exports minus imports) to GDP at factor cost, representing the total income of a country’s residents.
Formula: GNP at Factor Cost = GDP at Factor Cost + (Exports − Imports)Net National Product (NNP) at Factor Cost: NNP deducts depreciation from GNP at factor cost, representing the net income of residents after accounting for asset depreciation.
Formula: NNP at Factor Cost = GNP at Factor Cost − DepreciationGNP at Market Price: GNP at market price includes indirect taxes and subtracts subsidies from GNP at factor cost.
Formula: GNP at Market Price = GNP at Factor Cost + Indirect Taxes − SubsidiesNNP at Market Price: NNP at market price is NNP at factor cost adjusted for indirect taxes and subsidies.
Formula: NNP at Market Price = NNP at Factor Cost + Indirect Taxes − Subsidies
India’s Gross Domestic Product (GDP) is divided into three main sectors: Primary, Secondary, and Tertiary, each playing a crucial role in the country’s economic landscape.
Primary Sector (Agriculture and Allied Activities):
Historically dominant in underdeveloped economies, the primary sector includes agriculture, forestry, fishing, and mining. It contributes around 16-20% to India’s GDP but still employs over 40% of the workforce, emphasizing its importance for rural livelihoods.
Despite constraints like dependence on land and diminishing returns, this sector remains vital, especially with emerging areas like the Blue Economy enhancing marine and fisheries output.
Secondary Sector (Industry, Manufacturing, and Construction):
As India’s economy develops, the secondary sector becomes increasingly important. It involves manufacturing, construction, and industrial production, currently contributing about 25-30% to GDP.
This sector drives urbanization, capital investment, and technological advancement. Government initiatives like “Make in India” and “SAMARTH Udyog” support its growth, though challenges related to infrastructure and regulations remain.
Tertiary Sector (Services):
The fastest-growing sector in India and globally, the tertiary sector now accounts for over 50-55% of India’s GDP. It includes services such as IT, banking, education, healthcare, tourism, and transport.
This sector is the main engine of India’s recent economic growth, driven by digital innovation, expanding urban demand, and globalization.
India has seen a significant shift from an agriculture-based economy directly to a service-oriented economy, bypassing the traditional industrial phase to some extent. While this creates new employment opportunities in cities, it also leads to disparities, as large portions of the rural population remain dependent on agriculture, struggling with underemployment. Balanced growth across all sectors with focus on skill development and infrastructure is essential for inclusive progress.
Economic Health Assessment: GDP serves as a critical metric for measuring an economy's size, performance, and overall health by comparing current figures with historical data to identify growth or contraction trends.
Long-Term Economic Analysis: Analyzing GDP over extended periods reveals structural shifts and economic trajectory, enabling understanding of sustained growth potential and future challenges.
Policy Formulation Tool: Policymakers rely on GDP data to formulate and evaluate fiscal and monetary policies, assessing their impact on economic performance and development.
International Comparisons: GDP enables cross-country assessments of relative economic strength, competitiveness, and investment opportunities in the global marketplace.
Investment Decision Support: Domestic and foreign investors use GDP data to evaluate market conditions, business potential, and economic stability before making investment decisions.
Standard of Living Indicator: GDP per capita reflects average living standards and citizen well-being, while growth correlates with employment generation and poverty reduction.
While GDP is a crucial indicator of economic activity, it has several important limitations that must be recognized for a complete understanding of a country's well-being.
Exclusion of Informal and Non-Market Activities: GDP does not capture unrecorded economic activities such as household work, volunteer services, or informal sector jobs, which can be significant in economies like India’s. It also overlooks leisure time and its contributions to quality of life.
Geographical and Ownership Limitations: GDP excludes profits earned domestically by foreign companies that are repatriated abroad, which can overstate the economic output of the host country without benefiting its residents substantially.
Focus on Material Output Over Social Well-being: GDP growth measures economic output but does not account for social factors like income inequality, poverty, or environmental degradation. Activities harmful to the environment or society may even increase GDP, masking declines in quality of life.
Ignore Business-to-Business Transactions: GDP only includes the market value of final goods and services, ignoring intermediate goods and services, which can lead to an incomplete picture of economic fluctuations.
Counting Unproductive Expenditures as Growth: Expenditures related to administrative overheads, wasteful investments, or security-related spending due to conflicts and crime are added to GDP, even though they do not create real wealth or welfare.
Due to these gaps, complementary indicators such as Green GDP, Human Development Index (HDI), and income inequality measures are increasingly used alongside GDP to provide a holistic view of economic and social progress.
UPSC Previous Year Questions
Prelims
Q. With reference to the Indian economy, consider the following statements:
The rate of growth of Real Gross Domestic Product has steadily increased in the last decade.
The Gross Domestic Product at market prices (in rupees) has steadily increased in the last decade.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Answer: (b)
Q. A decrease in the tax-to-GDP ratio of a country indicates which of the following?
Slowing economic growth rate
Less equitable distribution of national income
Select the correct answer using the code given below:
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Answer: (a)
Mains
Q. Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments. (2019)
Q. Define potential GDP and explain its determinants. What are the factors that have been inhibiting India from realizing its potential GDP? (2020)
Q. Explain the difference between computing methodology of India’s Gross Domestic Product (GDP) before the year 2015 and after the year 2015. (2021)
FAQ's
Q. What is the meaning of gross domestic product?
A. Gross domestic product (GDP) is the total value of all final goods and services produced within a country during a specific period.
Q. How is GDP calculated in India?
A. By summing output (value-added) of all sectors, or by C+I+G+(X–M), or by total incomes. India uses 2011–12 as the base year and blends production, expenditure and income data.
Q. Who calculates GDP in India?
A. The National Statistical Office (NSO) under MoSPI (formerly CSO) compiles and releases India’s GDP and national income statistics.
Q. What is per capita GDP?
A. GDP divided by population. It shows the average income per person (India’s per capita GDP is relatively low, reflecting its large population).
Q. What is the tax to GDP ratio?
A. The tax-to-GDP ratio is total tax revenue as a percentage of GDP, measuring how much of national output is collected in taxes. It indicates the government’s revenue-generating capacity.
Conclusion
In summary, GDP is the foremost measure of India’s economic output and growth. It tells us the size and trajectory of the economy, and is a key metric in both UPSC prelims and mains. However, UPSC aspirants must remember that “GDP growth ≠ economic welfare”. GDP alone does not capture social equity, health, education or environment.
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