Previous Year Question
With reference to the Indian economy, consider the following statements:
The Gross Domestic Product (GDP) has increased by four times in the last 10 years.
The percentage share of the public sector in GDP has declined in the last 10 years.
Which of the statements given above is/are correct?
1 only
2 only
Both 1 and 2
Neither 1 nor 2
Correct Answer: B
Detailed Solution
The question requires a distinction between the absolute size of GDP, its growth rate and the percentage share of a particular sector in GDP.
Statement 1 is incorrect. India’s GDP at current market prices increased considerably during the approximately ten years preceding the question, but it did not become exactly four times its earlier size.
At current prices, India’s GDP was approximately ₹50 lakh crore in 2007-08. It increased to around ₹171 lakh crore by 2017-18. Thus, it increased by approximately 3.4 times, not four times.
Moreover, if GDP is measured at Constant Prices, the increase would be smaller because Real GDP removes the effect of inflation.
The relevant distinction is:
Nominal GDP: Output measured at Current Prices; it includes the effects of both real production and price increases.
Real GDP: Output measured at Constant Prices; it removes the effect of inflation.
Therefore, a statement that GDP increased fourfold depends upon the valuation prices and the period selected. According to the prescribed period and official data relevant to the question, the statement was not correct.
Statement 2 is correct. The percentage share of the public sector in GDP declined during the preceding ten years. This does not necessarily mean that the actual output or monetary size of the Public Sector declined. It means that the Private Sector expanded faster relative to it.
Following economic liberalisation after 1991:
Private-sector participation increased in several industries;
Industrial Licensing was reduced;
The number of industries reserved for the public sector declined;
The process of Disinvestment was adopted;
Private investment expanded in telecommunications, aviation, banking, insurance and infrastructure;
More sectors were opened to domestic and foreign private capital.
If Public Sector output grows by 5% while Private Sector output grows by 10%, the absolute output of the public sector may increase even though its percentage share in GDP declines.
The public-sector contribution to GDP may include economic activities of the general government, departmental enterprises and Public Sector Enterprises. It is not the same as the total size of the government budget or merely the profits of government companies.