How Is Per Capita Income Calculated?

One of the most commonly used measurements by economists and policymakers when assessing the economic health of an area is per capita income. To simply define per capita income: it's the average income of the people residing in a particular geographic area, like a city, state, or nation. It's a handy measure of the economic health of the population and gives an idea about the standard of living in the area.

Calculating India's National Per Capita Income

India’s national per capita income is calculated by the National Statistical Office (NSO) under the Ministry of Statistics and Programme Implementation (MoSPI). The NSO releases per capita income data annually in its publication called “Estimates of National Income”.

The methodology for the calculation of per capita income includes these key steps:

Step 1: Calculating National Income

The first step is to calculate India's national income for the financial year. The NSO calculates the national income through the income method, which takes into consideration the following:

• Employee compensation such as salaries, wages, and allowances
• Operating surplus and mixed income of companies
• Interest, rent, dividends, and profit earned on investments
• Net factor income from abroad

This provides the Net National Income (NNI) at current prices. The NNI is then adjusted for inflation to arrive at the real NNI or national income.

Step 2: Estimating Mid-year Population

The second step is to estimate the average population of India in the Financial Year (FY). The NSO uses population figures from the previous census and takes into account the population growth rate to approximate the mid-year population.

For example, for the current FY, the population projections from the 2011 census were taken and adjusted for estimated population growth to arrive at the mid-year population estimate.

Step 3: Dividing National Income By Population

Once the national income and mid-year population figures are available, the per capita income is calculated by simply dividing the national income by the population estimate.

For example, let’s assume India’s national income is ₹145.7 trillion, and the mid-year population estimate is 1.33 billion. therefore, the per capita income will be calculated as:

Per Capita Income = National Income/Population

= ₹145.7 trillion/1.33 billion

= ₹109,326

Therefore, India’s per capita income would be around ₹109,326.

Factors Affecting India’s National Per Capita Income

• GDP growth: A higher Gross Domestic Product (GDP) growth rate directly impacts national income levels and per capita earnings.

• Population growth rate: A higher population growth rate results in lower per capita income, even if national income rises.

• Employment trends: Rising employment and income levels boost national income and per capita earnings.

• Tax collections: Higher tax collections by the government contribute to national income.

• Corporate earnings: Profitability and earnings of companies operating in India add to the national income.

• Agricultural output: Higher agricultural production and crop yields flow into national income via farm incomes.

• Global oil prices: As an importer of oil, high crude prices exert downward pressure on India's national income.

• Currency exchange rate: Depreciation of the rupee results in higher earnings for exporters and thus boosts income levels.

Methodology For State Per Capita Income

Apart from the national per capita income, the NSO also computes and publishes per capita income estimates for every state in India every year. The method to determine per capita income for states includes the following:

Step 1: Estimating State Domestic Product

The Gross State Domestic Product (GSDP) is used as the measure of income. The GSDP for each state is available from the respective State Directorate of Economics and Statistics.

The GSDP is calculated through the production approach by aggregating the value of all goods and services produced within the state for the financial year.

Step 2: Adjusting For Commuters' Income

The GSDP is then adjusted for income earned by commuters. This accounts for income earned by residents of a state while working in another state.

For example: Income earned by residents of Haryana while commuting daily to work in Delhi.

Step 3: Estimating Mid-year State Population

The mid-year population for each state is estimated based on the latest census data and projected population growth rates.

Step 4: Computing Per Capita Income

The state's GSDP adjusted for commuters' income is divided by the mid-year population to arrive at the state per capita income.

Challenges In Estimating India’s Per Capita Income

While per capita income serves as an important metric, there are certain limitations in its calculation methodology for a diverse country like India.

• Being an average, it hides income disparities within states. Affluent regions inflate the average.

• Difficult to accurately capture the incomes of poorer sections who work in the unorganized sector.

• Does not account for differing price levels and costs of living across states.

• Does not reflect the distribution of income among the population. High inequality can exist despite a rise in per capita income.

• Does not factor in the quality of public infrastructure and services which impact living standards.

• Hard to fully adjust for temporary migrant populations across states.

• Time lag between collection of macroeconomic data and its inclusion in per capita income estimates.

Conclusion

Per capita income, when used along with other social and economic indicators, can offer useful insights into the economic well-being of the country and its citizens. However, it does not reveal the complete picture regarding income distributions and actual standards of living. Policymakers need to be mindful of these aspects when using per capita income data to make strategic decisions for equitable growth and development.