Gross Domestic Product etc - 32

Gross/Net Value Added

3.14 A few other points also need to be taken into account while estimating
the state product at factor cost. Firstly, capital is one of the primary factors
used in production and it results in the consumption of fixed capital in the
process of production and hence as reduction in the economic life of the
capital, or in other words the capital depreciates as a result of its use in the
process of production. The estimates of value added without any
adjustments for the capital depreciation/consumption referred to above is
termed as gross value added. If an adjustment is made for capital
depreciation/consumption the estimate of net value added is obtained. The
estimation of depreciation provision or the amount of inputs of capital in the
form of consumption of capital in the process of production is complicated as
the value of assets may get depleted fast due to technological changes and
also because the quantity of stock of assets changes every year. The
general practice is to estimate depreciation or consumption of fixed capital
during a year on a straight-line basis (known as perpetual inventory method
(PIM)) with reference to the expected economic life of different types of fixed
capital. This method is followed at national level.
3.15 However, the PIM procedure for estimating CFC is not possible at
state level or district level, due to the non-availability of data on capital stock
in the state/district. Therefore, the CSO estimates the CFC at state level
using various proxy indictors and provides them to the State DESs. The
State DESs on their part allocate the state level CFC estimates to the District
on the basis of domestic product estimates.[Reproduced from CSO Publication]