Depreciation

Also called: Depreciation of capital, Consumption of fixed capital, capital consumption · Topic: National Income Accounting: GDP, GVA and Welfare · NCERT: Class 11, Ch 4 "Human Capital Formation in India"; Class 12, Ch 2 "National Income Accounting"

Meaning

Depreciation, also called Consumption of Fixed Capital (CFC), is the fall in the value of fixed assets (machines, buildings, vehicles) during a year. It happens because of normal wear and tear, normal obsolescence (the asset becoming outdated in the expected way) and normal accidental damage [3].

It matters because it separates gross figures from net figures. Part of each year's output only replaces worn-out capital. Only what is left after that is a real addition to the economy's capacity and income.

• NCERT formula (straight-line method): Depreciation per year = Cost of capital good ÷ Years of useful life
• National accounts identity: NDP/NNI = GDP/GNI − CFC [2]
• Investment link: Net investment = Gross investment − Depreciation

Explanation

How it works

• Capital goods (tools, machines, buildings) help production without being changed themselves. They are used over many production cycles, so they slowly wear out.
• Depreciation is an annual allowance for expected wear and tear. It spreads the cost of an asset over its working life.
• It is an accounting concept. A firm may spend nothing on replacement in a given year, but it still records depreciation.
• Across thousands of firms, some machines are replaced every year.

• So actual replacement spending in the whole economy roughly equals total depreciation.

• NCERT's constant-rate assumption: a machine with a 20-year life loses 1/20 of its value each year. Real accounts may use other methods.

What is included and what is not

Included in CFC	Not included in CFC
Physical deterioration (normal wear and tear)	Losses from major disasters (earthquakes, floods)
Normal obsolescence (expected ageing of technology)	Losses from wars
Normal accidental damage (the routine, expected kind)	Sudden, unexpected destruction

• Losses from major disasters or wars are recorded separately as other changes in the volume of assets [3]. They do not reduce NDP through CFC.
• Trap: CFC does include normal accidental damage. It leaves out only unexpected, large-scale destruction.
• Only fixed assets depreciate. Intermediate goods (steel, cotton, fuel) are used up within the year and counted as intermediate consumption (inputs used up in production). Fixed assets are not intermediate consumption. Their wear and tear is recorded separately as CFC [3].

Gross vs net: the worked example

• A firm buys a machine for ₹20 lakh with a 20-year life.

• Depreciation = 20 ÷ 20 = ₹1 lakh per year.

• Suppose, for the whole economy in a year:

• Gross investment (all new capital goods, including replacements) = ₹100 crore
• Depreciation = ₹30 crore
• Net investment = 100 − 30 = ₹70 crore

• Capital stock at end of year = Opening capital stock + ₹70 crore

• If gross investment were only ₹30 crore:

• Net investment = 30 − 30 = zero

• The capital stock is only kept intact. It does not grow.

• If gross investment were below ₹30 crore: net investment turns negative and the capital stock shrinks.

What makes depreciation rise or fall

• Bigger capital stock → more assets wearing out → higher CFC.
• Shorter asset lives → faster write-off. For example, when more of the capital stock is in software and computers, which go out of date quickly, CFC rises.
• Stock-flow link: capital stock is a stock (measured at a point of time). Depreciation, like investment, is a flow (measured per year). Flows change the stock: Closing capital stock = Opening stock + Gross investment − Depreciation.

In India

• Who measures it: the National Statistics Office (NSO) under MoSPI (Ministry of Statistics and Programme Implementation).
• Method: MoSPI estimates capital stock with the Perpetual Inventory Method (PIM) [4].
• It adds up past investment flows.
• It removes assets as they reach the end of their service life.

• Depreciation (CFC) estimates come out of the same exercise [4].

• Series: India's new GDP series with base year 2022-23 was released on 27 February 2026. It replaced the 2011-12 base series [2].

• Latest figures (current prices, 2022-23 base):
• CFC: ₹39.47 lakh crore (2023-24) → ₹42.54 lakh crore (2024-25) [2]
• That is about 13.4% of GDP in 2024-25 (42.54 ÷ 318.07) [2].
• GDP ₹318.07 lakh crore vs NDP ₹275.53 lakh crore (2024-25). The gap is exactly CFC [2].
• Gross Capital Formation (GCF): ₹109.25 lakh crore (2024-25) [2]. So net capital formation ≈ 109.25 − 42.54 = ₹66.71 lakh crore. This is the real addition to India's capital stock that year [2].
• Saving side: gross saving ₹111.13 lakh crore. Net saving (gross saving − CFC) = ₹68.59 lakh crore (2024-25) [2].

Don't confuse with

• Currency depreciation: a fall in the exchange value of the rupee against other currencies. It has nothing to do with CFC. Same word, different topic (external sector vs national income).
• Intermediate consumption: inputs used up fully within the year (cotton, fuel). CFC is only the part of a fixed asset's value lost during the year [3].
• Catastrophic losses: destruction from major disasters or wars is not CFC. It is recorded as other changes in the volume of assets [3].
• Replacement investment: actual spending on new machines to replace old ones. Depreciation is an accounting allowance and may be recorded even when no spending takes place.

Prelims Hooks

• NDP = GDP − CFC; NNI = GNI − CFC [2]. Gross and net differ only by depreciation.
• Net investment = Gross investment − Depreciation. If gross investment equals depreciation, net investment is zero and the capital stock only stays intact.
• CFC covers physical deterioration, normal obsolescence and normal accidental damage. Losses from major disasters and wars are excluded [3].
• MoSPI estimates capital stock and CFC using the Perpetual Inventory Method [4].
• India's CFC was ₹42.54 lakh crore in 2024-25, about 13.4% of GDP (2022-23 base series, NSO) [2].
• Trap: depreciation is a flow (per year), while capital stock is a stock. "Depreciation = capital stock" is wrong.

Mains Points

• Gross vs net for welfare (GS-III): CFC was about ₹42.5 lakh crore (2024-25), around 13% of GDP [2]. So headline GDP overstates the resources actually free for consumption and new investment.
• NNI/NDP is a better base for judging sustainable income.

• Natural capital (forests, groundwater, soil) is not depreciated at all in GDP. This supports the case for Green GDP, which would subtract the running down of natural resources as well.

• Investment quality and growth: GCF of ₹109.25 lakh crore shrinks to about ₹66.71 lakh crore of net capital formation once CFC is removed (2024-25) [2].

• Growth depends on the net addition to capital, not the gross figure.

• As an economy's capital stock grows, more of each year's investment goes only to replacement. So it has to invest more just to keep growing at the same pace.

• Measurement reform (GS-III, statistics): Under SNA 2008, R&D is treated as fixed capital [3]. Assets like R&D and software go out of date quickly, so treating them as capital raises measured CFC. The 2022-23 rebase used new data sources and methods [2]. That is why depreciation, NDP and net saving figures from the old and new series cannot be compared directly.

Related concepts

• Final goods
• Intermediate goods
• Consumer goods
• Consumer durables
• Capital goods
• Double counting
• Stock variable
• Flow variable
• Investment
• Gross investment

Read more

• Building blocks: final vs intermediate goods, stocks vs flows, investment and depreciation