National Income and Per Capita Income: Measurement of Growth for RBI Grade B ESI

Last updated: 2026-11-10 · MockMentor

"Measurement of growth: National Income and per capita income" opens the Growth and Development unit of the RBI Grade B Phase 2 Economic and Social Issues (ESI) syllabus. Almost every economy answer you write leans on it. A question on the Budget, inflation, the Economic Survey or Viksit Bharat will expect you to use GDP, GVA, nominal and real growth and per capita income correctly, and to know their limits.

This page covers the topic in full: what national income is, how India measures it, what changed with the new 2022-23 base year, what per capita income tells us, and why growth is not the same as development. It starts with the basic ideas of economics that the rest of the chapter builds on.

In one line: national income measures the value of everything an economy produces in a year; per capita income divides it by the population; and neither tells us, on its own, how well people actually live.

Basic concepts

• National income: the total income earned by the normal residents of a country in a year, from producing goods and services. Technically it is Net National Product at factor cost (NNP at FC), also called Net National Income (NNI).
• Gross Domestic Product (GDP): the market value of all final goods and services produced within the country's borders in a year, whoever produces them.
• Gross Value Added (GVA): the value of output minus the value of inputs used up in producing it. It is the production-side measure of the economy, sector by sector.
• Final and intermediate goods: a final good is bought for consumption or investment (a car bought by a family). An intermediate good is used up in producing something else (steel bought by the car maker). Only final goods enter GDP, so nothing is counted twice.
• Depreciation (Consumption of Fixed Capital): the wear and tear of machines, buildings and equipment during the year.
• Net Factor Income from Abroad (NFIA): income Indian residents earn abroad from their labour and capital, minus what foreigners earn in India.
• Base year: the year whose prices are used to value output, so that growth reflects more production and not just higher prices.
• Per capita income: national income divided by the population. It is an average, not what a typical person earns.

Why in News?

1. On 27 February 2026, the National Statistics Office (NSO) under the Ministry of Statistics and Programme Implementation (MoSPI) released a new series of national accounts with 2022-23 as the base year, replacing 2011-12.
2. On 29 May 2026, the NSO's provisional estimates put India's real GDP growth for 2025-26 at 7.7%, up from 7.1% in 2024-25. Nominal GDP was about ₹346 lakh crore.
3. On 31 August 2026, the NSO estimated that real GDP grew 7.8% in the April to June quarter of 2026-27, the first quarter of the year.

The economic problem: scarcity and choice

Every economy, rich or poor, faces the same basic problem. Human wants are unlimited and keep growing, but the resources to satisfy them (land, labour, capital and time) are limited and have alternative uses. This is scarcity. Because of scarcity, every society has to make choices, and every choice has a cost: the value of the best alternative given up, called opportunity cost. A government that spends ₹1 lakh crore on highways gives up the schools or hospitals that money could have built.

Economics is the study of how individuals, firms and governments make these choices. It answers three central questions for any economy: what to produce, how to produce it, and for whom.

The Production Possibility Curve (PPC) shows the combinations of two goods an economy can produce with its resources and technology. Points on the curve are efficient; points inside it mean resources are idle, as in a recession; points outside it are out of reach until the economy grows. Economic growth shifts the whole curve outward.

Microeconomics and macroeconomics

National income accounting is the base of macroeconomics, which is why it opens the ESI syllabus.

Factors of production and factor payments

Goods and services are produced by combining four factors of production. Each earns a reward, and the sum of these rewards is national income.

Land is fixed in supply and does not move. Labour cannot be separated from the worker, so its quality depends on health and skills. Capital is produced by saving and investment and wears out over time. The entrepreneur is the only factor whose reward, profit, can be negative.

Types of goods

The same good can be final or intermediate depending on who buys it and why. Milk bought by a household is final; milk bought by a sweet shop is intermediate. National income counts only final goods, to avoid counting the same value twice.

The circular flow: why output equals income equals spending

Picture a simple economy with only households and firms. Households own land, labour, capital and enterprise. They supply these to firms and receive rent, wages, interest and profit. Firms use them to produce goods and services, which households then buy with the same income. Money flows one way and goods and factor services flow the other.

This is why national income can be measured at three points of the circle: where output is produced, where income is earned, and where it is spent. In a full economy we add three more sectors. The government takes taxes and spends, the financial system turns savings into investment, and the rest of the world buys our exports and sells us imports. Savings, taxes and imports are leakages from the circle. Investment, government spending and exports are injections. When injections are more than leakages, the economy expands. When they are less, it contracts.

The aggregates and how they connect

Students often try to learn a dozen formulas separately. You need only three switches. Every aggregate differs from another on one or more of them.

Start from GDP at market prices and apply the switches:

• GDP at market prices minus depreciation gives Net Domestic Product (NDP) at market prices.
• GDP at market prices plus NFIA gives Gross National Product (GNP), also called Gross National Income (GNI).
• GNP minus depreciation gives Net National Product (NNP) at market prices.
• NNP at market prices minus net indirect taxes gives NNP at factor cost, which is national income.

For India, NFIA is negative. Foreign companies and investors earn more in India, as profits, dividends and interest, than Indian residents earn abroad as factor income. So India's GNI is a little smaller than its GDP.

One point examiners like to test: money sent home by Indians working abroad is mostly a current transfer, not factor income, because the worker is usually no longer a normal resident of India. Remittances are therefore not part of NFIA. They enter Gross National Disposable Income (GNDI), which adds net current transfers from abroad to GNI.

From national income to what households can spend

What is counted and what is left out

The rule is simple: count the value of final goods and services produced in the year, and the income earned from producing them. Several common items fail this test.

The exclusion of unpaid domestic and care work is the most debated item. Most of it is done by women, so GDP undervalues their contribution to the economy, a point worth using in any gender or welfare answer.

Three ways to measure national income

1. Product or value added method

Add the value added by every producing unit in the economy. Value added is the value of output minus the value of intermediate inputs. A baker who buys flour for ₹40 and sells bread for ₹100 adds ₹60. Counting only value added at each stage avoids double counting. In India this method is used for most sectors, and the sum across sectors gives GVA.

2. Income method

Add the factor incomes paid out in production: compensation of employees (wages, salaries and employer contributions), rent, interest, profit, and the mixed income of self-employed people, where labour income and profit cannot be separated. Mixed income matters a great deal in India because so many people run small shops, farms and workshops on their own account.

3. Expenditure method

Add the final spending on goods and services produced in the country:

GDP = Private Final Consumption Expenditure (PFCE) + Government Final Consumption Expenditure (GFCE) + Gross Capital Formation (GCF) + Exports minus Imports

GCF is investment in machines, buildings and infrastructure (Gross Fixed Capital Formation), plus changes in stocks and purchases of valuables such as gold.

In theory, all three methods give the same number, because every rupee spent on final output becomes someone's income. In practice, they come from different data, and the gap between the production and expenditure estimates is shown as "discrepancies" in India's accounts. Large discrepancies have been a long-standing criticism, which the new series tries to reduce.

India's GDP from the spending side

Household consumption is the backbone of demand in India. That is why weak rural consumption or slow wage growth shows up quickly in GDP numbers.

Real GDP, nominal GDP and the deflator

Nominal GDP values output at the prices of the current year. Real GDP values it at the prices of the base year, so it rises only when the economy actually produces more. The two are linked by the GDP deflator:

GDP deflator = (Nominal GDP ÷ Real GDP) × 100

Suppose prices rise 10% and output does not change. Nominal GDP rises 10%, but real GDP stays flat. That is why growth is always quoted in real terms.

The deflator differs from the Consumer Price Index (CPI) in an important way. CPI tracks a fixed basket of goods that households buy, including imports. The deflator covers everything produced in India, including capital goods and exports, and its weights change every year with the pattern of output.

A gap between nominal and real growth also matters for policy. The Union Budget is built on nominal GDP, because tax revenue depends on current prices. When inflation is low, nominal growth slows even if real growth is strong, and the government's revenue and debt ratios look weaker. In 2025-26, for example, real growth of 7.7% came with nominal growth of only about 8.9%.

GVA and GDP: two sides of the same production

GVA at basic prices measures what each sector adds. GDP at market prices is the demand-side figure:

GDP = GVA at basic prices + product taxes minus product subsidies

Product taxes include the Goods and Services Tax (GST) and excise duties. If the government raises GST rates, GDP can rise even when nothing extra is produced. GVA would not. That is why sector-wise growth is read from GVA, while GDP is used for international comparison and for ratios such as the fiscal deficit or debt to GDP.

India moved to this international practice in 2015. Before that, the headline measure was GDP at factor cost.

Basic price, factor cost and market price

These three ways of valuing output differ only in how taxes and subsidies are treated:

• Factor cost is what the factors of production receive.
• Basic price is factor cost plus production taxes (taxes not linked to how much is produced, such as land revenue or stamp duty on business property), minus production subsidies.
• Market price is basic price plus product taxes (GST, excise duty), minus product subsidies (on fertiliser or food).

So GVA at factor cost plus net production taxes gives GVA at basic prices, and GVA at basic prices plus net product taxes gives GDP at market prices.

How India measures national income

A short history

• Dadabhai Naoroji made the first estimate of India's per capita income for 1867-68, about ₹20 a year, in "Poverty and Un-British Rule in India".
• V.K.R.V. Rao produced the first scientific estimates for 1925-29 and 1931-32.
• The National Income Committee, chaired by P.C. Mahalanobis, was set up in 1949. The Central Statistical Organisation (CSO) began publishing official estimates in the 1950s.
• In 2019, the CSO and the National Sample Survey Office (NSSO) were merged to form the NSO under MoSPI.

India follows the United Nations System of National Accounts (SNA). Over the years the base year has moved from 1948-49 to 1960-61, 1970-71, 1980-81, 1993-94, 1999-2000, 2004-05, 2011-12 and now 2022-23.

The release calendar

Each estimate replaces the last, so a growth figure can change by half a percentage point or more over its life. Always state which estimate you are quoting.

The new GDP series with base year 2022-23

Why base years are revised

An economy's structure keeps changing. In 2011-12 there were no large digital payment platforms, gig work was small, and GST did not exist. If we keep valuing output with the weights and data sources of an old year, new sectors are underestimated and declining ones overestimated. Revising the base year updates three things: the prices used to value output, the weights of different sectors, and, most importantly, the data sources and methods. 2022-23 was chosen as a recent normal year after the COVID-19 shock.

What changed

• New data: GST returns, company filings with the Ministry of Corporate Affairs (MCA), government accounts through the Public Financial Management System (PFMS), vehicle registrations on e-VAHAN, and data from RBI and the National Bank for Agriculture and Rural Development (NABARD).
• Better coverage of the informal sector: estimates for unincorporated businesses and households now come from annual surveys, the Annual Survey of Unincorporated Sector Enterprises (ASUSE) and the PLFS, instead of being projected from old benchmarks with proxy indicators.
• Deflation: manufacturing now uses double deflation, which deflates output and inputs separately with their own price indices. Earlier, one index was used for both, which could distort real growth when input prices (such as oil) moved very differently from output prices.
• Supply-Use Tables: these are now built into the estimates, to bring the production and spending estimates closer together and cut the discrepancy.
• Company data: for companies working in several activities, value added is split across activities by their turnover, instead of placing the whole company in one sector.
• Quarterly estimates: these now follow the International Monetary Fund's (IMF) Quarterly National Accounts Manual, and household consumption uses the latest Household Consumption Expenditure Survey (HCES).

What the new series shows

The base-year GDP for 2022-23 is ₹261.18 lakh crore at current prices. MoSPI plans to release a back series, linking the new numbers to earlier years, by December 2026. Until then, long-run comparisons across the two series should be made with care.

The debate

Supporters say the new series uses far richer administrative data and finally measures the informal economy directly instead of assuming it moves with the formal sector. Critics of past revisions, especially the 2011-12 series, argued that using company data to estimate the informal sector exaggerated growth, particularly after demonetisation and GST hit small firms hardest. The new reliance on annual informal sector surveys answers much of that criticism. The test now is transparency: publishing the detailed methods, and the back series, so that independent economists can check the numbers.

Per capita income

Per capita income is national income divided by the mid-year population. It is the simplest way to compare living standards across countries and over time.

Why the average can mislead

• It hides inequality. If the income of the top 10% doubles and everyone else stays where they are, per capita income still rises.
• It ignores what the income buys. Free health care, schooling or rations raise welfare without showing up as income.
• It ignores prices across countries. ₹100 buys much more in India than its dollar value buys in the United States. Purchasing Power Parity (PPP) adjusts for this, which is why India is the third-largest economy in PPP terms but much lower in per capita rank.
• State averages differ hugely. Per capita income in the richest states is several times that in Bihar or Uttar Pradesh.

Per capita income and Viksit Bharat

The goal of a developed India by 2047 is usually read as reaching high-income status under the World Bank's classification, which in 2025 began at a Gross National Income per capita of about US$13,900. India today is a lower middle-income country. Getting there in two decades requires real growth of around 7% to 8% a year, sustained, along with a stable rupee and slowing population growth. Because the threshold itself rises with world inflation, the target keeps moving.

Economic growth and economic development

Economic growth is a rise in the real output of an economy, usually measured by real GDP. Economic development is broader: an improvement in the quality of life of people, which includes health, education, freedom, security and a fair share in the gains of growth.

Growth without development is possible. An economy can grow on mineral exports while most people stay poor, or grow while pollution, inequality and joblessness rise. Development without growth is hard to sustain, because a poor economy cannot fund schools, hospitals and safety nets for long.

Why GDP is not a measure of welfare

Simon Kuznets, who built the first national accounts of the United States in the 1930s, warned that the welfare of a nation can hardly be inferred from a measure of national income. The reasons are worth listing in any descriptive answer:

1. Distribution: GDP says nothing about who gets the income.
2. Non-market work: unpaid care and domestic work are left out.
3. Environmental damage: cutting a forest adds to GDP, but the loss of the forest is not subtracted.
4. Bads counted as goods: spending on treating pollution-related illness or on security raises GDP.
5. Leisure and quality: a longer working week raises output, but people may be worse off.
6. The informal sector is hard to measure, so GDP in a country like India carries a margin of error.

Better measures of development

Since GDP falls short as a measure of welfare, economists use other indicators alongside it. The best known is the Human Development Index (HDI) published by the United Nations Development Programme (UNDP), which combines life expectancy, schooling and income. In the 2025 Human Development Report, India's HDI value was 0.685, ranked 130 out of 193 countries. Our chapter on human development covers the HDI and its related indices in full. Other measures include the Multidimensional Poverty Index, Green GDP, which subtracts the depletion of natural resources and the cost of pollution (the Ministry of Statistics and Programme Implementation (MoSPI) publishes annual environmental accounts), and Bhutan's Gross National Happiness.

The Stiglitz-Sen-Fitoussi Commission, set up by France in 2008, recommended shifting attention from production to wellbeing: looking at household income and consumption instead of GDP alone, and measuring distribution and sustainability alongside averages.

The capability approach

Amartya Sen argued that development should be judged by the freedoms people have, what he called capabilities: to be healthy, educated, to take part in society, to choose their work. Income is a means to these ends, not the end itself. This idea underpins the HDI and is the strongest theoretical base for a descriptive answer on growth versus development.

Sources of economic growth

An economy's output can rise for only a few reasons, and growth accounting splits growth between them:

1. More labour: a growing working-age population, or more people, especially women, joining the workforce.
2. More capital: investment in machinery, factories, roads, ports and power. India's investment rate of about a third of GDP is a major driver of its growth.
3. Better human capital: a healthier, more skilled workforce produces more per hour.
4. Technology and efficiency: better methods, digitalisation and the movement of resources from low- to high-productivity uses. This is measured as Total Factor Productivity (TFP), the part of growth not explained by more labour and capital.
5. Institutions and policy: secure property rights, stable prices, open trade and efficient markets let all the other factors work.

Growth that depends only on adding more labour and capital eventually slows, because of diminishing returns. Sustained growth needs rising productivity.

Inclusive growth

The Eleventh Five Year Plan (2007-12) made inclusive growth its central aim: growth that is broad-based across sectors and regions, creates productive jobs, reduces poverty and gives the poor access to education, health and finance. Inclusive growth is judged by who benefits as well as by how fast the economy grows. Its markers include the growth of incomes of the bottom 40%, the share of formal jobs, regional convergence and access to basic services.

Theories of growth in brief

Economic systems

How a society answers the questions of what, how and for whom to produce depends on its economic system.

India chose a mixed economy at Independence, with the public sector holding the "commanding heights" (heavy industry, banking, infrastructure) and a large private sector alongside. The 1991 reforms shifted the balance towards markets while keeping the state's role in welfare and regulation. Our chapter on the economic history of India covers this shift.

Sectors of the economy

The quaternary and quinary sectors are parts of the tertiary sector, separated to show the rise of knowledge work.

As economies develop, the share of output and jobs moves from the primary sector to the secondary and then the tertiary sector. India's path has been unusual. Services now produce over half of its GVA, while agriculture and allied activities produce under a fifth but still employ over two-fifths of workers. Manufacturing never became the large employer that it was in China or South Korea. This gap between where output is produced and where people work is the root of India's low productivity and low wages in farming, and a recurring theme in descriptive questions.

Challenges in measuring India's economy

• Nearly half of India's output and most of its workers are in the informal sector, where records are thin.
• Large and frequent revisions make it hard to judge the economy in real time.
• Gaps between the production and expenditure estimates are still sizeable.
• The services sector, especially digital and gig work, changes faster than surveys can track.
• Delays in the Census mean population figures, and so per capita estimates, rest on projections.

Way forward

• Publish detailed methods, sources and the back series on time, so that independent economists can check and use the data.
• Conduct the annual informal sector and labour surveys regularly and integrate GST and digital payments data more fully.
• Build the HCES into a regular survey so that consumption and poverty can be tracked every few years.
• Give more weight to distribution, wellbeing and natural capital alongside GDP, through satellite accounts and state-level human development reports.
• Strengthen state and district income estimates, which matter for planning and for the Finance Commission's devolution.

Possible exam and interview questions

1. Why are base years of national accounts revised periodically? What changes has the 2022-23 base year brought to the measurement of India's GDP? (420 words)
2. "GDP tells us how big the economy is, but not how well it is doing." Critically examine the strengths and limits of GDP as a measure of growth and suggest complementary indicators. (620 words)
3. Distinguish between economic growth and economic development. Can India's high growth be called inclusive development?
4. Why is per capita income a poor guide to living standards in a country like India?
5. Interview: India is among the fastest-growing large economies, yet its per capita income rank is low. How would you explain this to a layperson?

For a topic-wise view of what was asked in earlier years, see our RBI Grade B previous year question analysis. For practice in writing such answers, see the descriptive writing guide.

More in ESI

• Human Development
• Poverty
• Employment
• Sustainable Development
• Economic History and Planning

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