From Farms to Factories to Services: India’s GDP Explained via Production Approach 22Feb2026
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In a previous article a few days ago, we analysed how a country's gross domestic product or GDP can be measured, under expenditure approach, by tracking spending — consumption, investment, government spending and trade.
But GDP can also be measured by looking at what the economy produces. And when we measure production, we are also measuring income — because every act of production generates income for someone (Production / Income approach).
In India’s official data, the production and income approaches are presented together through sector-wise Gross Value Added (GVA).
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Related blogs:
Indian Economy Data Bank
Understanding India’s GDP – A Simple Guide to the Expenditure Approach 18Feb2026
What is GDP?
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2. GDP Formula Under the Production (Income) Approach:
In India, the Ministry of Statistics and Programme Implementation (MoSPI) calculates GDP on the production side using this formula:
GDP at Market Prices = GVA (Gross Value Added) at Basic Prices + Net Taxes on Products
Most countries follow the same formula under the United Nations System of National Accounts (SNA), calculating GDP as the sum of value added by all sectors plus net product taxes.
Terms explained:
Gross Domestic Product, or GDP, is the total value of production of all final goods and services produced within a country’s borders in a given period, usually a year or a quarter.
Gross Value Added or GVA is the value of goods and services produced by a sector or the economy, minus the value of inputs used in production.
Net Taxes on Products is the difference between taxes on products (like GST, excise, customs) and subsidies on products (like food or fertiliser subsidies).
Adding this converts production measured at basic prices into current prices, which reflects what consumers actually pay.
So in simple terms:
GDP = Value the economy produces (and earns) + net effect of taxes and subsidies
3. A Two-Person Economy: Ami and Gol:
While the formula may look technical, the underlying idea is quite simple: GDP measures the value that production adds to the economy — and that value becomes someone’s income.
To see this clearly, imagine a very small economy with only two people.
It is almost a Robinson Crusoe-style island economy — just two people producing and trading. Yet even here, the rules of GDP remain exactly the same. 😁
Ami grows wheat.
Gol produces meat.
Suppose in one year:
Ami produces wheat worth Rs 100.
Gol produces meat worth Rs 150.
The total value of goods produced is Rs 250. That is the GDP of this tiny economy under the production approach.
But notice something important: that same Rs 250 is also the total income earned. Ami earns Rs 100 from selling wheat. Gol earns Rs 150 from selling meat.
Production creates income. Measuring production is therefore also measuring income.
GDP Is About Value Added, Not Total Sales:
Now suppose Gol buys wheat worth Rs 20 from Ami to feed his livestock before producing meat.
If we simply added all sales together, we would end up double-counting that Rs 20. GDP avoids this by counting only value added.
Gross Value Added (GVA) is defined as:
GVA = Value of Output − Value of Intermediate Inputs
In this example:
Ami’s GVA = Rs 100 (she uses no intermediate inputs).
Gol’s output is Rs 150, but he used Rs 20 worth of wheat as input.
So Gol’s GVA = Rs 150 − Rs 20 = Rs 130.
Total GVA in the economy:
Rs 100 + Rs 130 = Rs 230.
This Rs 230 represents the actual new value created in the economy.
Introducing Taxes and Subsidies:
Now let us introduce the role of government.
Suppose the government imposes a tax of Rs 10 on meat. Consumers now pay Rs 160 for meat instead of Rs 150. That Rs 10 goes to the government.
Total GVA remains Rs 230 — because producers still created Rs 230 worth of value.
But GDP at market prices must reflect what buyers actually pay.
So we add taxes on products.
If there are no subsidies, then:
Net Taxes on Products = Rs 10
GDP = GVA + Net Taxes
GDP = Rs 230 + Rs 10
GDP = Rs 240
Now suppose instead the government gives a subsidy of Rs 4 on wheat. Consumers pay Rs 96 instead of Rs 100.
Then:
Taxes on products = Rs 10
Subsidies on products = Rs 4
Net Taxes = Rs 10 - Rs 4 = Rs 6
GDP = GVA + Net Taxes = Rs 230 + Rs 6 = Rs 236
Full Picture:
This tiny example captures the complete production (income) approach.
First, we calculate the value added by each producer — the GVA.
Then we adjust for taxes and subsidies to move from basic prices to market prices.
In general:
GDP = Sum of GVA across all sectors + Taxes on products − Subsidies on products.
Even in this two-person economy, the logic is the same as in a large country like India. The scale is different, but the principle is identical.
Production creates value.
Value becomes income.
And after adjusting for taxes and subsidies, we arrive at GDP.
4. From Two People to 1.45 Billion – How India Measures Production in the Real World
In our small island example, the economy had only two producers — Ami and Gol. We could easily calculate their output, subtract intermediate inputs and arrive at Gross Value Added. The logic was simple because the scale was small.
Now imagine applying the same logic to a country of more than 1.45 billion people.
India obviously cannot track production person by person. Instead, it groups economic activity into broad sectors. The MoSPI compiles national income data by measuring Gross Value Added across these sectors and then adding net taxes on products to arrive at GDP at market prices.
The structure remains the same as in our two-person example. Only the scale changes.
In India’s official national accounts, production is divided into three major sectors:
Primary,
Secondary, and
Tertiary (Services).
These three sectors are further classified as follows by economic activity:
Primary Sector:
Agriculture, Livestock, Forestry & Fishing, and
Mining & Quarrying.
Secondary Sector:
Manufacturing,
Electricity, Gas, Water supply & Other Utility Services, and
Construction.
Tertiary Sector:
Trade, Hotels, Transport, Communication & Broadcasting,
Financial, Real Estate & Professional Services, and
Public Administration, Defence & Other Services.*
(* Public Administration, Defence & Other Services category includes the Other Services sector i.e. Education, Health, Recreation, and other personal services)
India’s total GVA is the sum of value added across the Primary, Secondary and Tertiary sectors.
Why GVA matters
GDP gives the overall size of the economy, but GVA shows which sectors are driving growth. Strong growth in agriculture may indicate rising rural incomes. Industry growth signals more manufacturing activity and jobs.
A booming services sector reflects increasing urban employment and higher incomes in trade, IT, finance, and administration.
The core principle remains unchanged
Whether it is Ami and Gol on a tiny island or 1.45 billion people across India: production creates value, value becomes income, summing value added across sectors gives GVA and adjusting for taxes and subsidies gives GDP.
The scale changes, but the economic principle does not.
5. What Each Sector Contributes to India’s Economy
According to MoSPI estimates, India's GVA for FY 2025-26 stands at Rs 323.48 lakh crore. Adding Rs 33.66 lakh crore of Net Taxes on Products, we get nominal GDP at current prices of Rs 357.14 lakh crore.
As the chart below shows, the services sector (tertiary sector) commands the largest share of India’s Gross Value Added at 56.4 per cent, making it the biggest driver of economic growth.
Within services, Financial, Real Estate & Professional Services stand out as the largest sub-sector, contributing 23.7 per cent of GVA at market prices.
This reflects the rapid expansion of banking, insurance, real estate, IT and related professional activities.
They are followed by Trade, Hotels, Transport, Communication & Broadcasting, which together make up 17.4 per cent of GVA, highlighting the importance of distribution, mobility and communication services.
Among the broader economy, Agriculture and allied activities remain significant, contributing 16.8 per cent of total GVA, underlining the continuing role of the primary sector despite the dominance of services.
This sector-wise breakdown explains why India’s GDP has grown into a Rs 357 lakh crore economy, led by a booming services sector with finance and real estate at its core.
6. Closing Comments
Measuring GDP through the production approach shows not just the size of India’s economy — Rs 357 lakh crore — but where growth comes from. The services sector leads, with finance, real estate and professional services at the forefront, followed by trade, transport and other services.
Agriculture and manufacturing remain important but contribute less to total GVA.
This highlights that production creates value, which becomes income; and taxes and subsidies adjust it to market prices. From Ami and Gol to 1.45 billion people, the principle is the same.
GDP and GVA together tell the story of how India produces wealth and livelihoods.
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References and additional data:
Countries use two methods to calculate GDP: Production approach and Expenditure approach.
Production
Approach measures GDP by adding up everything the economy produces.
Imagine listing all the goods and services made in a country — from
crops and cars to banking and software — and calculating the value added
at each stage of production. In short, it answers the question: “How
much did we produce?”
Expenditure Approach computes GDP by adding
up all the spending on final goods and services. It includes what
households spend (consumption), what the government spends
(consumption), what businesses invest (investment) and what the country
exports minus what it imports. In short, it answers the question: “How
much did we spend on what was produced?”
GDP estimates from both
methods align because total output in an economy must equal total
spending on that output — production and expenditure are simply two
perspectives on the same economic activity.
SNA - The United Nations System of National Accounts (SNA) is the internationally accepted framework for measuring GDP in a consistent and comparable way across countries. It provides standardised definitions, classifications and accounting rules that national statistical agencies follow.
MoSPI press release 07Jan2026 - First Advance Estimates for FY 2025-26
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