17.4 Indian Economy Essentials: National Income, Inflation, Fiscal Indicators, GST & External Sector
Key Takeaways
- GDP at market prices equals GVA at basic prices plus product taxes minus product subsidies, and India's GDP series was rebased to 2022-23 on February 27, 2026.
- India's Consumer Price Index moved to base 2024 = 100 in February 2026, and the Wholesale Price Index moved to base 2022-23 = 100 from June 2026.
- The Union Budget 2026-27 targets a fiscal deficit of 4.3% of GDP, after 4.4% in 2025-26 (Revised Estimate), and aims to reduce Central Government debt to about 50 ± 1% of GDP by March 31, 2031.
- GST 2.0, effective September 22, 2025, moved most goods and services to two main rates of 5% and 18%, with a 40% rate for select luxury and sin goods.
- India's foreign exchange reserves consist of foreign currency assets, gold, Special Drawing Rights and the reserve tranche position with the IMF.
17.4 Indian Economy Essentials: National Income, Inflation, Fiscal Indicators, GST & External Sector
Exam Focus: General/Financial Awareness questions often test the concepts behind economic news: what GDP measures, which index tracks inflation, what the fiscal deficit target is, how GST is structured, and what makes up forex reserves. This section explains those concepts with the latest verified figures.
1. National Income Concepts
| Term | Definition |
|---|---|
| GDP (Gross Domestic Product) | Value of all final goods and services produced within the country's borders in a period |
| GVA (Gross Value Added) at basic prices | Value of output minus intermediate consumption, before product taxes |
| GDP at market prices | GVA at basic prices + product taxes − product subsidies |
| GNP (or GNI) | GDP + net factor income from abroad |
| NDP | GDP − depreciation (consumption of fixed capital) |
| NNP at factor cost (National Income) | NNP at market prices − net indirect taxes |
| Nominal vs. real GDP | Nominal GDP uses current prices; real GDP uses constant base-year prices |
| GDP deflator | (Nominal GDP ÷ Real GDP) × 100 |
Base year: The National Statistics Office (NSO) of the Ministry of Statistics and Programme Implementation released the new GDP series with base year 2022-23 on February 27, 2026, replacing the 2011-12 base.
Worked Example
Suppose, in Rs. lakh crore: GVA at basic prices = 300, product taxes = 35, product subsidies = 5, net factor income from abroad = −6, and depreciation = 36.
- GDP at market prices = 300 + 35 − 5 = 330
- GNP at market prices = 330 + (−6) = 324
- NNP at market prices = 324 − 36 = 288
2. Inflation and Its Measures
| Index | Compiled by | Current base | What it covers |
|---|---|---|---|
| Consumer Price Index (CPI) | NSO, MoSPI | 2024 = 100 (first released February 12, 2026) | Retail prices of goods and services; headline CPI is the RBI's inflation target |
| Wholesale Price Index (WPI) | Office of the Economic Adviser, DPIIT | 2022-23 = 100 (new series from June 2026) | Wholesale prices of goods |
| Index of Industrial Production (IIP) | NSO, MoSPI | 2022-23 (new series announced for release on May 28, 2026) | Volume of industrial output; it is not an inflation index |
Key Inflation Terms
- Headline inflation: Change in the overall CPI, including food and fuel.
- Core inflation: Inflation excluding volatile food and fuel items.
- Demand-pull inflation: Prices rise because demand outpaces supply.
- Cost-push inflation: Prices rise because production costs such as wages, fuel and raw materials increase.
- Disinflation: Inflation is still positive but falling.
- Deflation: The general price level falls.
- Stagflation: High inflation combined with stagnant growth and high unemployment.
The RBI's target is 4% CPI inflation within a 2%–6% band for April 2026 to March 2031 (Section 15.2).
3. Fiscal Indicators in the Union Budget 2026-27
| Indicator | Figure |
|---|---|
| Fiscal deficit, 2025-26 (Revised Estimate) | 4.4% of GDP |
| Fiscal deficit target, 2026-27 (Budget Estimate) | 4.3% of GDP |
| Central Government debt, 2025-26 (Revised Estimate) | 56.1% of GDP |
| Central Government debt, 2026-27 (Budget Estimate) | 55.6% of GDP |
| Debt goal | About 50 ± 1% of GDP by March 31, 2031 |
| Capital expenditure, 2026-27 (Budget Estimate) | Rs. 12.2 lakh crore |
From 2026-27, the Centre uses the debt-to-GDP ratio as its fiscal anchor, setting each year's deficit so that debt keeps declining. The formulas for revenue, fiscal and primary deficits are in Section 17.2.
4. Goods and Services Tax (GST)
| Feature | Details |
|---|---|
| Constitutional basis | 101st Constitutional Amendment Act, 2016 |
| Launch | July 1, 2017 |
| Nature | Destination-based tax on the consumption of goods and services |
| Intra-state supply | CGST (Centre) + SGST or UTGST (State or Union Territory) |
| Inter-state supply and imports | IGST, collected by the Centre and apportioned |
| GST Council | Constitutional body under Article 279A, chaired by the Union Finance Minister; each State nominates its finance or taxation minister (or another minister) as a member |
| GST 2.0 (from September 22, 2025) | Two main rates of 5% and 18%, plus 40% for select luxury and sin goods; the 12% and 28% slabs were removed after approval at the 56th GST Council meeting on September 3, 2025 (certain tobacco products initially stayed on their earlier rates) |
5. External Sector
Balance of Payments (BoP)
| Account | Main components |
|---|---|
| Current account | Merchandise trade (exports and imports of goods), services trade, primary income (investment income and compensation of employees) and secondary income (mainly remittances) |
| Capital and financial account | Foreign direct investment (FDI), foreign portfolio investment (FPI), external commercial borrowings, banking capital including NRI deposits, and other flows |
| Errors and omissions | Statistical balancing item |
| Change in reserves | The net result, reflected in foreign exchange reserves |
A current account deficit (CAD) means payments for goods, services and income exceed receipts; it must be financed by capital inflows or by drawing down reserves.
FDI vs. FPI
A foreign investment of 10% or more of a listed company's post-issue paid-up equity is treated as FDI; below 10% it is FPI. FDI is long-term and carries management interest, while FPI is more mobile and sensitive to market conditions.
Foreign Exchange Reserves
India's reserves, managed by the RBI, have four components:
- Foreign Currency Assets (the largest component)
- Gold
- Special Drawing Rights (SDRs)
- Reserve Tranche Position with the IMF
Exchange Rate Terms
- Depreciation / appreciation: A market-driven fall or rise in the rupee's value.
- Devaluation / revaluation: A deliberate official change under a fixed exchange rate system.
- India follows a market-determined exchange rate, and the RBI intervenes to curb excessive volatility.
Common Traps
- GDP counts only final goods and services; adding intermediate goods double counts.
- WPI covers goods only, while CPI covers both goods and services.
- Disinflation (inflation falling but still positive) is not deflation (prices actually falling).
- FDI and FPI flows belong to the capital and financial account, not the current account.
Which expression gives GDP at market prices?
Under GST 2.0, effective September 22, 2025, which rate structure applies to most goods and services?
Which of the following is NOT a component of India's foreign exchange reserves?
What fiscal deficit target did the Union Budget 2026-27 set for the Central Government?