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Group-II Mains Supplement — Polity, Economy and AP Society · Chapter 3

National Income, Occupational Pattern and 1991 Reforms

What to remember

  • National income can be measured by three methods: product (value added), income and expenditure. All give the same total if done properly.
  • India's economy has shifted from agriculture to services in output, but agriculture still employs a large share of workers. This gap is a key feature of the occupational pattern.
  • The 1991 reforms (liberalisation, privatisation, globalisation) followed a balance of payments crisis. They ended most licensing and opened trade and foreign investment.

Basic concepts

  • GDP (Gross Domestic Product): value of all final goods and services produced within the country in one year.
  • GNP (Gross National Product): GDP plus Net Factor Income from Abroad (NFIA). NFIA = income earned by Indians abroad minus income earned by foreigners in India.
  • Depreciation (consumption of fixed capital): wear and tear of capital.
  • NNP = GNP minus depreciation. NDP = GDP minus depreciation.
  • Factor cost and market price: GDP at market price = GDP at factor cost + indirect taxes − subsidies. Net indirect taxes are taxes minus subsidies.
  • National Income (NNP at factor cost) = NNP at market price − net indirect taxes.
  • GVA (Gross Value Added) at basic prices = GDP at market prices − (product taxes − product subsidies). Since 2015 India reports GVA by sector.
  • Expenditure method: GDP = C + I + G + (X − M). C is private consumption, I investment, G government spending, X exports, M imports.
  • Per capita income = National Income ÷ population.
  • Nominal vs real: nominal GDP uses current prices; real GDP uses constant prices of a base year. GDP deflator = (nominal GDP ÷ real GDP) × 100.

Worked example. Suppose GDP at market price is 1,000, NFIA is 20, depreciation is 80, and net indirect taxes are 100.

  • GNP = 1,000 + 20 = 1,020.
  • NNP at market price = 1,020 − 80 = 940.
  • National income (NNP at factor cost) = 940 − 100 = 840.
  • If population is 10, per capita income = 84.

Second example: nominal GDP 600 and real GDP 500 gives a deflator of 120, meaning prices rose 20 percent over the base.

MeasureFormula
GNPGDP + NFIA
NNPGNP − depreciation
GDP at market priceGDP at factor cost + net indirect taxes
National incomeNNP at factor cost
GVA at basic pricesGDP at market price − net product taxes

Methods

MethodCountsWarning
Product (value added)Sum of value added at each stageAvoid double counting of intermediate goods
IncomeWages, rent, interest, profit, mixed incomeExclude transfer payments
ExpenditureConsumption, investment, government, net exportsIncludes only final spending

Transfer payments (pensions, scholarships, unemployment allowances), second-hand goods, and purchase of shares are not counted in national income. Own-consumption of farm produce is included in practice.

History of national income estimation

  • Dadabhai Naoroji gave the first estimate in the 1860s in his work on poverty under British rule.
  • V. K. R. V. Rao made the first scientific estimate for 1931-32.
  • The National Income Committee (1949) was chaired by P. C. Mahalanobis. The Central Statistical Office (CSO), set up in 1951, published its first official national income estimates in 1956; today the National Statistical Office (NSO) under the Ministry of Statistics and Programme Implementation (MoSPI) publishes them.
  • The 2011-12 base series, introduced in 2015, shifted reporting to GVA at basic prices. On 27 February 2026 MoSPI released a new series with base year 2022-23, replacing it.
  • States estimate Gross State Domestic Product (GSDP) through their own Directorates of Economics and Statistics, following national guidelines.

Limits of national income as a welfare measure. It ignores unpaid household work, the informal economy that is hard to record, environmental damage and the distribution of income. Per capita income is only an average; two States with the same figure can differ widely in poverty and inequality. This is why analysts also use human development indicators and poverty estimates along with income.

Occupational pattern

  • Workers are grouped into primary (agriculture, mining, fishing, forestry), secondary (manufacturing, construction, power) and tertiary (trade, transport, banking, IT, public services) sectors.
  • Clark-Fisher thesis: as an economy develops, employment first moves from primary to secondary and then to tertiary activity.
  • India's special pattern: services now contribute the largest share of GVA, yet agriculture continues to employ a bigger share of the workforce than its share of output. Manufacturing has not absorbed workers on the scale seen in East Asian economies. Many people therefore remain in low-productivity farm and informal work.
  • Disguised unemployment: more workers on a farm than needed; the removal of some does not reduce output.
  • Informal sector: most workers are in unorganised jobs without social security.
  • Data sources: Census, Economic Census, and the Periodic Labour Force Survey (PLFS) of the NSO, which reports worker-population ratio, labour force participation and unemployment rate.
  • Andhra Pradesh: agriculture and allied activities remain a major source of livelihood, while services lead in the value added of the State economy. For exact shares use the latest Socio-Economic Survey of the State.
SectorExamplesTrend
PrimaryCrops, livestock, fisheries, miningFalling share of GVA; large share of jobs
SecondaryManufacturing, constructionModerate share of both
TertiaryTrade, banking, IT, transport, public administrationLargest share of GVA; growing share of jobs

The 1991 crisis

By mid-1991 India faced a severe balance of payments crisis. Foreign exchange reserves were enough only for a few weeks of imports. Causes included high fiscal deficits through the 1980s, rising oil prices after the Gulf War, falling remittances, short-term external borrowing and political uncertainty. The Government pledged gold with foreign banks and sought help from the International Monetary Fund. P. V. Narasimha Rao was the Prime Minister and Dr Manmohan Singh the Finance Minister.

Reform measures (LPG)

Stabilisation (short-term): devaluation of the rupee in July 1991 in two steps; cuts in the fiscal deficit; import compression.

Structural reforms (long-term):

  • Industrial policy (24 July 1991): most industrial licensing abolished; the limits of the MRTP Act on big firms removed; reservation for the public sector cut sharply; automatic approval for foreign direct investment up to 51 percent in priority industries.
  • Trade policy: import licensing largely abolished and tariffs reduced in stages. The rupee became market-determined (1993) and current account convertibility was adopted in 1994.
  • Financial sector reforms: the Narasimham Committee (1991) and its second report (1998) recommended lower reserve ratios (CRR and SLR), freer interest rates, entry of private banks and prudential norms. SEBI got statutory powers in 1992.
  • Tax reforms: the Chelliah Committee (1991) advised lower, simpler rates and a broader base.
  • Public sector: disinvestment started and the PSU list was reduced.
  • Legal change: FERA gave way to the Foreign Exchange Management Act (FEMA), 1999; the Competition Act, 2002 replaced the MRTP Act.
TermMeaning
LiberalisationRemoving controls and licences
PrivatisationReducing state ownership, including disinvestment
GlobalisationIntegrating with the world economy through trade and investment
StabilisationShort-term correction of the payment and fiscal crisis

Effects. Growth became faster, the services sector expanded, foreign investment and exports rose, and IT grew rapidly. Concerns include regional and income inequality, weak job creation in manufacturing, and pressure on small farms.

Exam traps

  • GNP = GDP + NFIA, not GDP − NFIA.
  • National income is NNP at factor cost, not GDP at market price.
  • Transfer payments and second-hand sales are not part of GDP.
  • Indirect taxes are added when going from factor cost to market price, and subsidies are subtracted.
  • The first scientific estimate was by V. K. R. V. Rao; the first estimate was by Dadabhai Naoroji.
  • The New Industrial Policy of 24 July 1991 is different from the Industrial Policy Resolution of 1956, which built the public sector.
  • Narasimham Committee (financial sector) is different from the Chelliah Committee (taxation).
  • FERA was replaced by FEMA in 1999; MRTP by the Competition Act in 2002.

One-liners

  • 1. GNP = GDP + NFIA.
  • 2. NNP = GNP − depreciation.
  • 3. National income = NNP at factor cost.
  • 4. GDP at market price = GDP at factor cost + indirect taxes − subsidies.
  • 5. Expenditure approach: C + I + G + (X − M).
  • 6. First scientific estimate of national income: V. K. R. V. Rao.
  • 7. National Income Committee of 1949: P. C. Mahalanobis.
  • 8. India's current GDP series uses base year 2022-23 (released February 2026; earlier 2011-12).
  • 9. Clark-Fisher thesis links development to a shift from primary to tertiary.
  • 10. 1991 crisis: Prime Minister Narasimha Rao, Finance Minister Manmohan Singh.
  • 11. Industrial policy of 1991 abolished most licensing.
  • 12. Competition Act, 2002 replaced the MRTP Act.

Practice questions

  1. GNP is equal to

    1. GDP minus net factor income from abroad
    2. GDP plus net factor income from abroad
    3. GDP plus indirect taxes
    4. GDP minus depreciation
    Answer

    B. GDP plus net factor income from abroad

    GNP = GDP + NFIA.

  2. National income is another name for

    1. Gross National Product at market price
    2. Net Domestic Product at market price
    3. Net National Product at factor cost
    4. Gross Domestic Product at market price
    Answer

    C. Net National Product at factor cost

    NNP at factor cost is national income.

  3. Which of the following is NOT included in national income?

    1. Rent from a building
    2. Salary of a teacher
    3. Profit of a firm
    4. Pension paid by the government
    Answer

    D. Pension paid by the government

    Transfer payments are not counted as they involve no production.

  4. In the expenditure method, GDP is computed as

    1. C + S + T + (X + M)
    2. C + I + G + (X − M)
    3. C + I − G + X + M
    4. C − I + G + X − M
    Answer

    B. C + I + G + (X − M)

    Consumption, investment, government spending and net exports.

  5. GDP at market price equals GDP at factor cost plus

    1. direct taxes minus subsidies
    2. subsidies minus indirect taxes
    3. depreciation
    4. indirect taxes minus subsidies
    Answer

    D. indirect taxes minus subsidies

    Net indirect taxes are added to reach market price.

  6. Suppose GDP at market price is 2,000, NFIA is 50 and depreciation is 150. GNP is

    1. 2,150
    2. 1,950
    3. 2,050
    4. 1,850
    Answer

    C. 2,050

    GNP = 2,000 + 50 = 2,050.

  7. With GDP at market price 2,000, NFIA 50 and depreciation 150, NNP at market price is

    1. 2,050
    2. 1,900
    3. 1,950
    4. 1,850
    Answer

    B. 1,900

    GNP = 2,050; NNP = 2,050 − 150 = 1,900.

  8. If NNP at market price is 1,900 and net indirect taxes are 200, national income is

    1. 1,900
    2. 1,500
    3. 1,700
    4. 2,100
    Answer

    C. 1,700

    NNP at factor cost = 1,900 − 200 = 1,700.

  9. National income is 1,700 and population is 17. Per capita income is

    1. 100
    2. 17
    3. 10
    4. 1,000
    Answer

    A. 100

    1,700 ÷ 17 = 100.

  10. If nominal GDP is 750 and real GDP is 500, the GDP deflator is

    1. 250
    2. 67
    3. 125
    4. 150
    Answer

    D. 150

    (750 ÷ 500) × 100 = 150.

  11. If a deflator rises from 100 to 125 in a period, the price level has risen by

    1. 125 percent
    2. 25 percent
    3. 12.5 percent
    4. 2.5 percent
    Answer

    B. 25 percent

    (125 − 100) ÷ 100 = 25 percent.

  12. Total consumption is 600, investment 200, government spending 150, exports 100 and imports 120. GDP is

    1. 1,170
    2. 810
    3. 930
    4. 1,050
    Answer

    C. 930

    600 + 200 + 150 + (100 − 120) = 930.

  13. The first scientific estimate of national income of India (1931-32) was made by

    1. Dadabhai Naoroji
    2. V. K. R. V. Rao
    3. Amartya Sen
    4. P. C. Mahalanobis
    Answer

    B. V. K. R. V. Rao

    Naoroji gave the first estimate; Rao the first scientific one.

  14. The National Income Committee of 1949 was headed by

    1. P. C. Mahalanobis
    2. D. R. Gadgil
    3. V. K. R. V. Rao
    4. Manmohan Singh
    Answer

    A. P. C. Mahalanobis

    It paved the way for the Central Statistical Office in 1951.

  15. Dadabhai Naoroji's work on national income is associated with the idea of

    1. Five Year Plans
    2. Green Revolution
    3. economic liberalisation
    4. drain of wealth under British rule
    Answer

    D. drain of wealth under British rule

    He estimated per capita income in the 1860s and wrote on poverty under British rule.

  16. Which body publishes India's official national income estimates?

    1. Reserve Bank of India alone
    2. NITI Aayog
    3. National Statistical Office under MoSPI
    4. Ministry of Finance
    Answer

    C. National Statistical Office under MoSPI

    The NSO (formerly CSO) is under MoSPI.

  17. The Clark-Fisher thesis says that as an economy develops, employment shifts

    1. from primary to secondary and then to tertiary sector
    2. from tertiary to primary sector
    3. only within agriculture
    4. from secondary to primary sector
    Answer

    A. from primary to secondary and then to tertiary sector

    It describes structural change of employment.

  18. Which pattern best describes India's economy today?

    1. Agriculture leads both output and jobs
    2. Manufacturing leads output and jobs
    3. Services lead jobs but contribute little output
    4. Services lead in output while agriculture still employs a large share of workers
    Answer

    D. Services lead in output while agriculture still employs a large share of workers

    The gap between output and employment shares is a feature of India's pattern.

  19. Disguised unemployment is most commonly found in

    1. telecommunications
    2. agriculture
    3. information technology
    4. banking
    Answer

    B. agriculture

    More workers than needed on small farms.

  20. Employment and unemployment data is released by the NSO through the

    1. Census of Banks
    2. Periodic Labour Force Survey
    3. Agricultural Census
    4. Economic Survey
    Answer

    B. Periodic Labour Force Survey

    PLFS gives labour force statistics.

  21. Which of the following is a tertiary sector activity?

    1. Manufacturing of steel
    2. Mining
    3. Fishing
    4. Banking
    Answer

    D. Banking

    Banking is a service.

  22. The balance of payments crisis of 1991 occurred when India's Prime Minister was

    1. P. V. Narasimha Rao
    2. Indira Gandhi
    3. Atal Bihari Vajpayee
    4. Rajiv Gandhi
    Answer

    A. P. V. Narasimha Rao

    The Finance Minister was Dr Manmohan Singh.

  23. The New Industrial Policy was announced on

    1. 1 April 1956
    2. 26 January 2001
    3. 24 July 1991
    4. 15 August 1947
    Answer

    C. 24 July 1991

    It removed most industrial licensing.

  24. Which of the following was NOT a feature of the 1991 reforms?

    1. Nationalisation of private banks
    2. Reduction in import tariffs
    3. Abolition of most industrial licensing
    4. Devaluation of the rupee
    Answer

    A. Nationalisation of private banks

    Bank nationalisation was done in 1969 and 1980.

  25. The Act that replaced the MRTP Act in 2002 was the

    1. FEMA
    2. Competition Act
    3. SEBI Act
    4. Companies Act
    Answer

    B. Competition Act

    The Competition Act, 2002 set up the Competition Commission.

  26. FERA was replaced by FEMA in

    1. 1991
    2. 2005
    3. 1999
    4. 2002
    Answer

    C. 1999

    FEMA is the Foreign Exchange Management Act, 1999.

  27. Which committee in 1991 recommended reforms in the banking and financial sector?

    1. Chelliah Committee
    2. Mahalanobis Committee
    3. Rangarajan Committee
    4. Narasimham Committee
    Answer

    D. Narasimham Committee

    The second Narasimham report came in 1998.

  28. The Chelliah Committee (1991) examined

    1. industrial licensing
    2. banking reforms
    3. agricultural prices
    4. tax reforms
    Answer

    D. tax reforms

    It suggested lower and simpler tax rates.

  29. Current account convertibility of the rupee was adopted in

    1. 1980
    2. 2008
    3. 1994
    4. 1947
    Answer

    C. 1994

    Rupee was made market determined in 1993 and current account convertible in 1994.

  30. In the 1991 policy, automatic approval for foreign direct investment was given up to

    1. 100 percent in all sectors
    2. 51 percent in priority industries
    3. 74 percent in all sectors
    4. 26 percent in all industries
    Answer

    B. 51 percent in priority industries

    The 1991 policy had a 51 percent limit.

  31. Stabilisation measures of 1991 were mainly

    1. short-term corrections of the payments and fiscal crisis
    2. land reform steps
    3. long-term industrial changes
    4. ownership changes in banks
    Answer

    A. short-term corrections of the payments and fiscal crisis

    Stabilisation is short-term; structural reforms are long-term.

  32. Match: (1) Liberalisation (2) Privatisation (3) Globalisation with (a) integration with world economy (b) reducing state ownership (c) removing controls. Choose the correct pairing.

    1. 1-c, 2-b, 3-a
    2. 1-b, 2-c, 3-a
    3. 1-a, 2-b, 3-c
    4. 1-c, 2-a, 3-b
    Answer

    A. 1-c, 2-b, 3-a

    Each term has the stated meaning.

  33. Consider the statements: 1. GNP is GDP plus NFIA. 2. Transfer payments are included in national income. Which is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    A. 1 only

    Transfer payments are excluded.

  34. Consider the statements: 1. Services contribute the largest share of GVA in India. 2. Agriculture employs more people than its share of output suggests. Which is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    C. Both 1 and 2

    Both describe India's occupational pattern.

  35. Consider the statements: 1. The Narasimham Committee dealt with financial sector reform. 2. The Chelliah Committee dealt with banking reform. Which is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    A. 1 only

    Chelliah dealt with taxes.

  36. Consider the statements: 1. FEMA replaced the MRTP Act. 2. The Competition Act, 2002 replaced the MRTP Act. Which is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    B. 2 only

    FEMA replaced FERA.

  37. Consider the statements: 1. The first scientific estimate of national income was by V. K. R. V. Rao. 2. The National Income Committee of 1949 was headed by Mahalanobis. Which is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    C. Both 1 and 2

    Both are correct.

  38. Consider the statements: 1. Real GDP is calculated at current prices. 2. Nominal GDP is calculated at base-year prices. Which is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    D. Neither 1 nor 2

    The statements are reversed: nominal is at current prices; real at constant prices.

  39. Consider the statements about 1991: 1. The rupee was devalued in July 1991. 2. Industrial licensing was abolished for most industries. Which is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    C. Both 1 and 2

    Both are correct.

  40. Consider the statements: 1. Per capita income is a perfect indicator of welfare. 2. It does not show the distribution of income. Which is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    B. 2 only

    It is an average and hides distribution.

  41. A State has nominal GSDP of 900 and real GSDP of 600. What is the implied price index?

    1. 300
    2. 50
    3. 67
    4. 150
    Answer

    D. 150

    (900 ÷ 600) × 100 = 150.

  42. A firm sells wheat worth 100 to a mill, the mill sells flour worth 160 to a baker, and the baker sells bread worth 250. Total value added is

    1. 410
    2. 250
    3. 510
    4. 160
    Answer

    B. 250

    Sum of value added = 100 + 60 + 90 = 250, equal to the final good value.

  43. Which of the following adds to GDP?

    1. Receipt of a scholarship
    2. Purchase of old shares
    3. Sale of a second-hand car
    4. Purchase of newly built house
    Answer

    D. Purchase of newly built house

    Only new final production counts.

  44. The 2011-12 base year GDP series introduced in 2015 moved to reporting

    1. GNP at market prices only
    2. GVA at basic prices
    3. NNP at factor cost only
    4. national debt
    Answer

    B. GVA at basic prices

    GVA at basic prices is the main output measure.

  45. Net National Product is obtained by subtracting which item from Gross National Product?

    1. Subsidies
    2. Net indirect taxes
    3. Depreciation
    4. Net factor income from abroad
    Answer

    C. Depreciation

    NNP = GNP − depreciation.

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