Q5(c). Write briefly on the following: Gross Domestic Product (GDP) and Net National Product (NNP); Balance of Payments (BoP); Liberalisation; Parallel Economy

Gross Domestic Product (GDP) and Net National Product (NNP)

Gross Domestic Product (GDP)

GDP is the total monetary value of all final goods and services produced within the geographical boundaries of a country in a given year.

It includes:

• Output produced by Indian residents, and
• Output produced by foreign companies operating in India (e.g., Hyundai Car Plant in Chennai contributes to India’s GDP).

Importance of GDP

• Indicator of domestic economic performance,
• Helps compare growth across years or countries,
• Influences fiscal policy, monetary policy, and investment decisions.

Net National Product (NNP)

NNP represents the net value of goods and services produced by the residents of a country after accounting for depreciation (capital consumption).

It is calculated as:

NNP = GNP – Depreciation

Where:

• GNP (Gross National Product) = GDP + income earned by Indian nationals abroad − income earned by foreigners in India.

Significance of NNP

• Shows true net addition to national wealth,
• Accounts for sustainability (how much capital stock is wearing out),
• Used for long-term development planning.

Example: If machines worth ₹500 crore depreciate yearly, this amount is deducted from GNP to obtain NNP.

Balance of Payments (BoP)

BoP is a systematic record of all economic transactions between residents of a country and the rest of the world during a year.

It comprises:

Current Account

Covers trade in goods, services, income, and transfers.

• Merchandise trade deficit,
• IT services exports surplus,
• Worker remittances (India receives over $110 billion, the world’s highest).

Capital Account

Transactions that change asset or liability position:

• External loans,
• Debt repayments,
• FDI/FII movements.

Financial Account

Movement of financial capital like:

• RBI foreign exchange reserves,
• SDR allocations,
• Banking flows.

Importance of BoP

• Indicates external sector health,
• Helps decide foreign exchange policy,
• Affects currency stability.

A BoP deficit may require borrowing, import controls, or drawing from forex reserves.

Liberalisation

Liberalisation refers to the removal or relaxation of government controls, licensing systems, trade restrictions, and market barriers, enabling freer economic activity.

Key Features of Liberalisation in India (Post-1991 LPG reforms):

• Abolition of Licence Raj,
• Opening up of FDI in sectors like telecom, aviation, banking, infrastructure,
• Deregulation of industries,
• Reduction of import tariffs and easing of customs rules,
• Financial sector reforms (private banks, capital markets),
• Privatisation of government enterprises.

Impact of Liberalisation

Positive:

• Higher economic growth (India grew at ~6.5% average post-1991),
• Increased exports, technological upgrade,
• More competition and efficiency.

Negative:

• Growing inequality,
• Jobless growth in some sectors,
• Vulnerability to global shocks.

India’s integration into the global market is largely due to liberalisation.

Parallel Economy

The parallel economy (black economy) comprises economic activities that are unrecorded, untaxed, illegal, or concealed from public authorities.

Sources of Parallel Economy

• Tax evasion,
• Hawala transactions,
• Corruption and bribery,
• Smuggling and narcotics trade,
• Benami property transactions,
• Under-reporting of income by businesses (cash payments, unregistered sales).

Impacts

• Revenue Loss to Government
  Reduces tax collection, affecting welfare and development spending.
• Distortion of Official Data
  GDP and Income estimates become inaccurate.
• Corruption and Criminalisation
  Black money strengthens criminal networks and political corruption.
• Weakening of Monetary Policy
  Large unregulated cash circulation reduces RBI’s control over inflation.

Measures to Curb Parallel Economy

• GST: simplified indirect taxation, reduces leakage,
• Benami Transactions Prohibition Act (2016),
• Digital payments (UPI revolution),
• PAN-Aadhaar linkage,
• Demonetisation (2016) to reduce high-denomination black cash,
• Income Disclosure Schemes.
• Parallel economy remains a major challenge but reforms are closing loopholes.