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The Indian GDP is Declining! Know the What, Why & How of This Decline

18 Sep 2019

‘The GDP is declining!’ We have heard this so many times in the past couple of days, especially post release of the RBI’s annual report which showed the India’s GDP growth rate marked only 5% in the first quarter of this financial year. In the previous quarter, the GDP growth rate had been 5.8% whereas in the first quarter of FY19, it was 8%.

While for any country, the worse that can happen to its economy is a negative GDP growth. However, for a behemoth like the Indian economy, the slowing down of the GDP growth rate to 5% is a big blow. The government, post the announcement by RBI, has taken certain measures to boost the various components of GDP. The results of this can only be seen in the next quarter.

The country’s GDP or Gross Domestic Product is currently placed at USD 2.72 trillion, at the seventh place in the world. The Finance Minister in her budget announcement had declared that India will be a USD 5 trillion economy by 2024, while touching USD 3 trillion by end of FY2020.

GDP can be calculated based on different modes. One of them is based on ‘spending’. This format has four key components and variations in these components impact the pace at which this index of a country’s economy is mapped.

These components and the recent trends in them are explained below:

1. Personal Consumption:

This is also called the private consumption expenditure and is defined by the money spent by households on consumer goods and services. This has been on the downfall since the FMCG sector (considered as the dark horse of an economy) started seeing a slowdown. Retail lifestyle stores extended their sale season as poor demand for the merchandise affected the volume of sales expected by them.

2. Business Investments or Investment Expenditure:

This is the amount of money spent by businesses on procuring goods and services to expand their business. Business investment is a critical component of GDP since it increases productive capacity and boosts employment. In a phase where companies are cutting back on jobs and are not able to produce new inventories, this signals towards a slowdown in the economy.

3. Government Expenditure:

This is the amount of money spent by the government on various schemes. Often a high percentage of this component indicates to a poorly managed economy. However, in some countries, a high government spending indicates to a stronger economy. In India, expenditure on health through schemes such as Ayushman Bharat and cost of infrastructural developments have gone up, thereby increasing the stake of this component in the overall GDP.  

4. Net Exports of Goods and Services:

This is the value of goods and services exported after subtracting the imports. The two components, exports and imports, have opposite effects on the GDP. While exports increase a country’s GDP, imports decrease the same. In the recent times, the import of good has gone up as a large part of imports are brought in from China.

A country like China which has the second largest GDP in the world has excessive exports and very low imports apart from having huge government spending. These two factors make China a GDP giant in the world at the cost of GDPs of the other countries it is exporting to, like India.

These factors have led the economy to a slowdown phase and have driven the prices of markets to a low. While some believe that the slowdown is cyclic others feel that it could be more of a deep-rooted phenomenon.

Key Takeaway

Smart investors and traders can search for an option to make money from this using the golden formula ‘Buy at Low, Sell at High’. This can be done by investing in the good business models which would recover soon after the crisis ends. You can identify such opportunities with the help of an investment advisor like CapitalVia Global Research Limited who can help you in building your portfolio in the right way to make the most of the volatility the stock markets are facing.

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