National Income After 2015 and the Expenditure Method

In the previous topic, we saw how India measured its national income before 2015, using Factor Cost as the reference point and relying on the Value Added and Income Methods. That entire framework was overhauled in 2015 with some significant changes. On top of that, there is a third way to look at GDP that we have not covered yet: the Expenditure Method, which flips the lens from “who produced it?” to “who spent on it?”

What Changed After 2015

India’s national income measurement went through three major shifts in one go:

New base year — The reference year used for calculating real GDP was updated from 2004-05 to 2011-12. A more recent base year means the price structure used to adjust for inflation better reflects what the economy actually looks like today.
New official measure — The headline GDP number switched from $GDP_{FC}$ (GDP at Factor Cost) to $GDP_{MP}$ (GDP at Market Prices). This is not just a relabeling; the entire calculation pathway changed.
New calculation method — The steps and intermediate concepts used to arrive at the final GDP figure were restructured. A new pricing concept called Basic Prices was introduced, sitting between the old Factor Cost and Market Prices.

A New Way to Classify Taxes and Subsidies

To understand the post-2015 framework, you first need to grasp a distinction that the old system did not make. The earlier framework clubbed all indirect taxes together into one lump called Net Indirect Taxes (NIT). The new framework splits these into two separate categories based on how they relate to production.

Production Taxes and Subsidies

These are linked to the process of production itself, not to how much a business actually produces. A factory pays these simply for being in operation, regardless of whether it makes ten units or ten thousand.

Production taxes — Examples include land revenue and stamp duties. A factory owes land revenue whether it runs at full capacity or sits idle.
Production subsidies — These reduce the cost of inputs used in production. Fertilizer subsidies are a classic example: the government lowers the price of a key input so that producers (farmers) face lower costs.

The net figure is:

$\text{Net production taxes} = \text{Production taxes} - \text{Production subsidies}$

Product Taxes and Subsidies

These are tied directly to each unit of a product that is bought or sold. The more you produce and sell, the more you pay (or receive).

Product taxes — GST and excise duty are the main examples. Every additional unit sold generates additional tax revenue.
Product subsidies — Food grain subsidies and LPG subsidies fall here. Each unit of subsidised grain or gas cylinder receives a per-unit benefit from the government.

The net figure is:

$\text{Net product taxes} = \text{Product taxes} - \text{Product subsidies}$

Why This Split Matters

The whole point of separating these two categories is to create a new intermediate pricing concept, Basic Prices, that captures the production-level taxes but leaves out the per-unit product taxes. This gives economists a cleaner mid-point for their calculations.

Understanding Basic Prices

Basic Price (BP) refers to the amount a producer receives per unit of output. It includes the effect of net production taxes (since those are tied to the production process) but does not include net product taxes (since those are applied per unit at the point of sale).

Think of it as a three-tier pricing ladder:

Pricing Concept	What It Includes
Factor Cost (FC)	Pure production cost, no taxes at all
Basic Price (BP)	Factor Cost + Net production taxes
Market Price (MP)	Basic Price + Net product taxes

Factor Cost sits at the bottom with no tax effects. Market Price sits at the top with all taxes included. Basic Price occupies the middle ground, picking up only the production-level taxes.

How GDP Is Calculated After 2015: Five Steps

The post-2015 framework follows a clear sequence to reach the final $GDP_{MP}$ figure.

Step 1: $GVA_{BP}$ for sectors using the Value Added Method

For the primary sector and registered manufacturing, the Value Added Method is applied just as before, but now the calculation is done at Basic Prices instead of Market Prices:

$GVA_{BP} = \text{Value of gross output of final goods at BP} - \text{Value of intermediate goods at BP}$

Since the output and input values are already at Basic Prices, the result directly gives Gross Value Added at Basic Prices for these sectors.

Step 2: $GVA_{FC}$ for remaining sectors using the Income Method

For services, unregistered manufacturing, and other sectors that are harder to track through output data, the Income Method is still used. This produces GVA at Factor Cost:

$GVA_{FC} = COE + MI + OS + \text{Provision for depreciation of fixed capital}$

This is the same Income Method formula used before 2015, with the same four components: Compensation of Employees, Mixed Income of Self-Employed, Operating Surplus, and depreciation.

Step 3: Convert $GVA_{FC}$ to $GVA_{BP}$ for Income Method sectors

The Income Method gives us values at Factor Cost, but we need everything at Basic Prices. The conversion is straightforward: add net production taxes:

$GVA_{BP} = GVA_{FC} + \text{Net production taxes}$

After this step, every sector in the economy has its GVA expressed at Basic Prices, regardless of which method was used to calculate it.

Step 4: Aggregate to get $GDP_{BP}$

All the sector-wise $GVA_{BP}$ figures are added up:

$GDP_{BP} = \sum GVA_{BP} \text{ (across all sectors)}$

This gives us the total GDP at Basic Prices for the entire economy.

Step 5: Add net product taxes to arrive at $GDP_{MP}$

The final step adds the per-unit product taxes (net of product subsidies) to reach the Market Price level:

$GDP_{MP} = GDP_{BP} + \text{Net product taxes}$

This $GDP_{MP}$ is India’s official measure of national income after 2015.

Why the Change Was Made, and Its Criticism

The government’s stated reason for overhauling the system was to align India’s national accounts with the UN System of National Accounts (SNA) 2008 recommendations. Most countries had already adopted this standard, and India was bringing its practices in line with the international norm.

However, the change has not been without criticism. The core argument against $GDP_{MP}$ is that $GDP_{FC}$ is conceptually a better measure. Here is why critics say this: GDP at Market Prices includes the effect of transfer payments (one-sided payments like taxes and subsidies). These are payments where money changes hands but no productive service is exchanged in return. Including them in the national income figure can inflate the number without reflecting a genuine increase in productive activity. $GDP_{FC}$ avoids this issue by stripping out all such tax and subsidy effects, giving a purer picture of what the economy actually produced.

The Expenditure Method: GDP From the Demand Side

So far, we have looked at GDP from the perspective of production: what each sector produces (Value Added Method) or what each producer earns (Income Method). The Expenditure Method approaches the same GDP figure from a completely different direction. Instead of asking “who produced it?”, it asks “who bought it?”

Every final good and service produced in the economy eventually gets purchased by someone: a household, a business, the government, or a foreign buyer. The Expenditure Method simply adds up all this spending:

$GDP = C + I + G + NX$

Each letter represents a different category of buyer:

C (Consumption) — This is Private Final Consumption Expenditure (PFCE), covering everything that households spend on goods and services for their own use. Food, clothing, rent, healthcare, entertainment, and transportation all fall under C. It is typically the largest component of GDP.
I (Investment) — This represents Gross Domestic Capital Formation (GDCF), the spending by firms on new machinery, factories, equipment, and changes in inventory. It captures how much the economy is investing in building up its productive capacity for the future.
G (Government Spending) — This is Government Final Consumption Expenditure (GFCE), covering the government’s own spending on goods and services. Salaries of government employees, defence equipment, public health services, and similar expenditures fall here.
NX (Net Exports) — This is the difference between what the country sells to the rest of the world (exports) and what it buys from abroad (imports). When exports exceed imports, NX adds to GDP. When imports are larger, NX pulls GDP down.

Why the Expenditure Method Matters for Policy

This demand-side view is particularly valuable for policy making. If the government wants to boost GDP growth, it can look at which component is underperforming and target it. If household consumption is sluggish, policies to boost income or reduce taxes might help. If investment is weak, lowering interest rates or offering incentives for capital spending could stimulate it. If net exports are dragging, trade policy becomes the focus. The Expenditure Method gives policy makers a clear map of where demand is coming from and where it is falling short.