State of growth: Here’s why state domestic product (SDP) is as important as GDP!

We have all heard the term GDP or gross domestic product but how many of us are aware of the concept of state domestic product and how it is calculated? Just as the GDP acts as a measure of the nation’s economic standing, the state domestic product indicates the economic position of a particular state. With India set to become the third-largest global economy, before the end of the ongoing decade, let us understand the concepts of GDP, state domestic product, and how the latter is calculated.

Decoding GDP

One of the most frequently mentioned terms in economics is GDP, which stands for gross domestic product. It is widely used as an indicator of the health of both national and global economies. At its core, GDP represents the monetary value of all final goods and services produced within a country during a specific period, such as a quarter or a year. These final goods and services are those purchased by the end user. GDP encompasses everything produced within a country’s borders, including both market sales and some non-market production like government-provided services such as defence and education. GDP is a crucial metric for understanding economic health, providing a broad overview of the economic activity occurring within a country. Similarly, the term state domestic product focuses on the economy of a particular state, within the country. According to reports, Maharashtra is at the forefront, contributing 15.7% to the nation's total GDP, while Uttar Pradesh is a close second with a 9.2% share. In terms of GDP share, other major states depict the following numbers – Tamil Nadu stands at 9.1%, Gujarat at 8.2%, and West Bengal at 7.5%.

Understanding SDP

State domestic product (SDP) is a key economic metric that represents the total monetary value of all goods and services produced within a state's geographical boundaries during a financial year. Also known as state income, SDP is crucial for calculating per capita income, which helps assess the economic well-being of a state's residents. By analysing SDP, we can gauge the economic prosperity of a state and observe structural changes within its economy. Over time, tracking SDP provides insight into the extent and direction of economic development, highlighting trends and shifts. Further, examining the sectoral composition of SDP reveals the relative contributions of different economic sectors – this analysis not only indicates significant structural changes but also aids in the formulation of strategic plans for comprehensive economic development. Understanding which sectors are growing or declining helps policymakers and business leaders make informed decisions to foster balanced and sustainable growth.

Calculating SDP

Calculating SDP involves a meticulous process that integrates diverse economic activities within a state. The procedure begins with extensive data collection on various sectors like agriculture, manufacturing, and services. Once gathered, this data is segmented by sector to allow for a detailed analysis of each sector's contribution to the state's economy. Typically, the State Income Division then compiles the SDP estimates for these sectors, following the guidelines from the System of National Accounts (SNA) 2008 and the National Statistical Office (NSO) in New Delhi. There are two forms of SDP that everyone should be aware of – nominal SDP, which reflects economic output at current market prices, and real SDP, which adjusts for inflation to provide a more accurate depiction of economic growth.

The estimation process for SDP generally follows a structured five-step approach:

Gross value added (GVA) is calculated by subtracting the value of inputs from the value of outputs.

The financial intermediation services indirectly measured (FISIM) figure includes banking and financial activities that are challenging to incorporate directly into the GVA calculations for various economic sectors, such as agriculture, manufacturing, and services. FISIM is determined at the national level by the Central Statistical Office (CSO) and then allocated to different states. It represents an imputed income equivalent to the interest and dividend receipts of financial enterprises minus the interest paid to depositors.

To derive the SDP, the intermediate input FISIM is subtracted from the GVA. This adjustment ensures that the contributions of financial intermediation are appropriately accounted for in the state's economic output.

Consumption of fixed capital (CFC) is then calculated to account for the depreciation of assets used in production.

Finally, the net state domestic product (NSDP) is obtained by adjusting the SDP for CFC. This provides a measure of the state's economic output after accounting for the depreciation of capital assets.

The growth rate of SDP is calculated by comparing the current year's SDP with that of the previous year, indicating the state's economic expansion or contraction. Further, per capita state income is derived by dividing the net SDP by the state's midyear projected population, serving as a reliable indicator of economic status.

In conclusion, SDP data is crucial for several reasons, including the fact that it helps quantify a state's economic performance by assessing its production, consumption, and income-generation activities and aids in resource allocation by highlighting key sectors that significantly contribute to the state's economy.