Indian Economy

The GDP deflator is the ratio of the value of goods and services an economy produces in a particular year at current prices, to that, at prices prevailing during any other reference (base) year. GDP deflator = (Nominal GDP/Real GDP)*100 This ratio basically shows to what extent an increase in GDP in an economy has happened on account of higher prices, rather than increased output. Hence, it is a good measure of inflation. For example: if an economy has a nominal GDP of $100 billion and has a real GDP of $80 billion, the economy’s GDP price deflator can be calculated as ($100 billion / $80 billion) x 100, which equals to 125. This means that the aggregate level of prices have increased by 25 percent from the base year to the current year. Other than GDP deflator, there are various indices such as Wholesale Price Index (WPI), Consumer Price Index (CPI), Producer Price Index (PPI), Commodity Price Index, Cost of Living Index, Capital Goods Price Index etc. that are used to measure inflation. But WPI and CPI are widely used indices to calculate inflation all over the world.

Differences between the GDP deflator, CPI and WPI are as follows:

• The GDP deflator covers the entire range of goods and services produced in the economy as against the fixed and limited commodity baskets for the WPI (no representation of the services sector) or CPI (based on only a basket of selected goods and services).
• Changes in consumption patterns or the introduction of new goods and services are automatically reflected in the deflator because it includes a ‘changing basket’. CPI reflects changes to a consumer’s cost of living and WPI captures price changes at the factory/wholesale level, but they do not reflect new expenditure patterns because of the ‘fixed basket’.
• GDP deflator includes only those goods which are produced domestically. Imported goods do not form the part of GDP and hence are not reflected in the GDP deflator. While both WPI and CPI consider import in their calculations.
• GDP deflator is available only on a quarterly basis along with GDP estimates, whereas CPI and WPI data are released every month. This is the another reason behind using CPI/WPI rather than GDP deflator.

In India, WPI was used as a key measure of inflation for a long time, but now CPI is ation for being used for the same, as it covers services and also measures inflation from consumers’ end instead of manufacturers’ end.

A government budget is an annual financial statement which outlines the estimated government expenditure and expected government receipts or revenues for the forthcoming fiscal year. The Budget in India comprises the following (a) Revenue Account and (b) Capital Account. Differences between them are:

• Revenue Accounts: It shows the revenue receipts and revenue expenditure of the government.

• Revenue receipts: Revenue receipts are non-redeemable receipts of the government i.e. they cannot be reclaimed from the government. They consist of tax and non-tax revenues. Tax revenues consist of the proceeds of taxes and other duties levied by the central government. Non-tax revenue mainly consists of Interest receipts on account of loans, dividends and profits on investment made by the government, fees and other receipts for services rendered by the government and cash grants in aid from foreign countries or institutions.
• Revenue Expenditure: Generally this expenditure neither creates any physical/financial asset nor reduces the liability of the government. It is expenditure incurred for the normal functioning of the government departments and various services, interest payments on debt incurred by the government and grants given to states even though some of the grant may be for creation of assets.

• Capital Accounts: It consists of capital receipts and capital expenditure of the government.

• Capital Receipts: These are such receipts of the government that either create liability or reduce financial assets. They include loans raised by the government from the public which are called market borrowings by the government from the RBI and commercial banks and financial institutes through sales of treasury, bills, loans received from foreign international organizations and recoveries of loans granted by the central government. Other items include small savings, provident funds and receipts obtained from the sale of shares in PSUs.
• Capital Expenditure: There are expenditures of the government which result in creation of physical or financial assets or reduction in financial liabilities. This includes expenditure on the acquisition of land, building, machineries, equipment, investment in shares and loans and advances by the central government to state and UTs.

Significance of increasing Capital Expenditure in an economy:

• Capital Expenditure is that part of the government spending which goes into the creation of assets like schools, colleges, hospitals, roads, bridges, dams, railway lines, airports and seaports. This infrastructure and asset creation is crucial for rapid economic growth.
• Increased capital expenditure helps in employment generation and brings about a structural shift in employment profile in the economy.
• Increased capital expenditure, in a way, also helps in income distribution and bridging economic inequality in the society as the infrastructure created benefits every section of the society.
• Capital expenditure also includes investment by the government that yields profits and dividends in future.

In India, both the Union government and state governments have been criticized for spending too little on creating assets. For e.g. 85-90 percent of the Union government’s spending goes into the revenue account. High revenue expenditure of the Union government has often been blamed for low economic growth. Thus increasing capital expenditure and capacity building are much needed in a country like India.