Union Budget: Understanding the GDP, GVA and the difference between the two

The Union Budget, or the annual financial statement, according to Article 112 of the Indian Constitution, is a statement of the estimated receipts and expenditures of the central government for a financial year running from April 1 to March 31.

The Union Budget, which keeps account of the government’s finances for the fiscal year, has two components — the Revenue Budget and the Capital Budget. The government’s revenue receipts and expenditure are listed under the Revenue budget, while the Capital budget deals with capital receipts and payments of the government. The former is akin to the profit & loss account of an enterprise, albeit on a much larger scale, while the latter is essentially a balance at the macro level.

Budget 2023-24; The fifth and the last full Budget of the Narendra Modi 2.0 government and Finance Minister Nirmala Sitharaman will likely be presented on February 1.

Since this is the Centre’s last full Budget before the general elections in April-May 2024, the government will present a “Vote on Account” for a limited period. The Budget is usually cleared till July.

What is GDP?

The total monetary or market value of all finished goods and services produced within a country’s borders within a specific period of time is called its gross domestic product (GDP). It is a comprehensive measure of the country’s economic health, expressed in terms of the overall domestic production and functions.

The GDP of a country includes all private and public consumption, government outlays, investments, additions to private inventories, paid-in construction costs, and foreign balance of trade. When calculating the GDP, exports are added to the value and the imports are subtracted. The most important element of a country’s GDP is the foreign balance of trade, which is a key determinant of the country’s economic health.

Simply put, if the total value of goods and services that domestic producers sell to foreign countries (exports) exceeds the total value of foreign goods and services that domestic consumers buy (import), the GDP will increase. This is called “trade surplus”. But if the country’s imports are more than its exports, resulting in a trade deficit, the GDP decreases.

GDP is the sum of the country’s private consumption, gross investment in the economy, government investment, government spending and the difference between exports and imports (net foreign trade).

What is GVA?

In situations where the GDP fails to measure the real economic scenario, the Gross Value Added (GVA) is a better gauge.

The GVA measures the total value of goods and services produced in an economy, and the amount of value added to a product. It is defined as the output produced after the deduction of the intermediate value of consumption. The GVA, in India, is measured at ‘basic prices’.

The difference between GDP and GVA

While the GDP measures the total value of products and services that the country manufactures or delivers, the GVA measures the value added to the product in order to enhance its worth.

The GDP gives the picture from the consumers’ angle or demand perspective, whereas the GVA gives a picture of the state of economic activity from the producers’ perspective or supply side. Notably, both measures might not match because of the difference in the treatment of net taxes.

The GVA provides a sector-wise breakdown, helping policymakers decide which sectors need incentives or stimulus and accordingly formulate sector-specific policies. But the GDP is a key measure while making a country-wide analysis and comparing the incomes of different economies.