From quite long we have been hearing this word GDP now and then. Many of us like me would not be knowing what it actually means. We might think it is something related to the economy of the country and to some extent it is true but there is more depth in this term which we need to understand. Today I will be taking you into the depth but in short.
GDP stands for Gross Domestic Product. Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of the country’s economic health.
Though GDP is usually calculated on an annual basis, it can be calculated on a quarterly basis as well. In the United States, for example, the government releases an annualized GDP estimate for each quarter and also for an entire year. Most of the individual data sets will also be given in real terms, meaning that the data is adjusted for price changes, and is, therefore, net of inflation.
GDP Formula Based on Spending
The expenditure approach, also known as spending approach, calculates the spending by the different groups that participate in the economy. This approach can be calculated using the following formula: GDP = C + G + I + NX, or (consumption + government spending + investment + net exports). All these activities contribute to the GDP of a country.
The C is private consumption expenditures or consumer spending. Consumers spend money to buy consumption goods and services, such as groceries and haircuts. Consumer spending is the biggest component of GDP, accounting for more than two-thirds of the U.S. .Consumer confidence, therefore, has a very significant bearing on economic growth. A high confidence level indicates that consumers are willing to spend, while a low confidence level reflects uncertainty about the future and an unwillingness to spend.
The G represents government consumption expenditure and gross investment. Governments spend money on equipment, infrastructure, and payroll. Government spending assumes particular importance as a component of GDP when consumer spending and business investment both decline sharply, as, for instance, after a recession.
The I is for private domestic investment or capital expenditures. Businesses spend money to invest in their business activities (buying machinery, for instance). Business investment is a critical component of GDP since it increases productive capacity and boosts employment.
NX is net exports, calculated as total exports minus total imports (NX = Exports - Imports). Goods and services that an economy makes that are exported to other countries, less the imports that are brought in, are net exports. A current account surplus boosts a nation’s GDP, while a chronic deficit is a drag on GDP. All expenditures by companies located in the country, even if they are foreign companies, are included in the calculation.
There are several types of GDP measurements:
Nominal GDP : is the measurement of the raw data.
Real GDP: takes into account the impact of inflation and allows comparisons of economic output from one year to the next and other comparisons over periods of time.
GDP growth rate: is the increase in GDP from quarter to quarter.
GDP per capita: measures GDP per person in the national populace; it is a useful way to compare GDP data between various countries.
GDP of India :
Now let me finally put my focus on GDP of India which we hear every day on news or read in our feed. It's quite obvious that GDP decides whether a country is rich or poor or whether it's economy is progressive or regressive. So what actually is happening to Indian GDP?
Let me first state you RBI governor statement as stated in liveMint :
"The Reserve Bank of India (RBI) today trimmed India's growth forecast for FY21 as the corona virus pandemic has disrupted economic activities. "The GDP growth in 2020-21 is expected to remain in the negative territory with some pick up in second half," RBI governor Shaktikanta Das told a press conference today.
He said economic activity in India was severely impacted by the nationwide lockdown in the last two months. The biggest blow to the economy has come from the slump in private consumption. Consumer durables production has reduced 33% in the March. Electricity consumption has also plunged. Service sector has contracted — passenger and commercial vehicle sales, domestic air passenger traffic and foreign tourist arrivals have slumped in March. However, agri sector remained the ray of hope, Das said."
Now this contraction is caused by lockdown right now and the main cause of it is because the demand in rural and urban market is decreasing and also export and import have contracted which means C and NX is decreasing causing depression in India's GDP graph.
Before lockdown there had been many other reasons which also led to regressive GDP which are:
1. Sharp decline in overall demand:
Demand is the real accelerator of the economy. If demand increases then the producer has to increase the production which can not be increased without hiring the more labour force.
Increment in the employment opportunities leads to further demand of the other products in the economy. Since last few months Indian economy is facing the problem of lower demand which ultimately trapped the whole economy.
2. Sharp fall in consumption
Consumption has accounted for 55-58% of GDP. Remember consumption is at the core of domestic demand in India. Indian economy experienced a sharp decline in private final consumption expenditure from 7.2% in the March quarter to 3.1% in the June.
3. Wrong procedure in the GST implementation gst-collection
Goods and Services Tax (GST) is a very boosting step (government is getting approximately Rs. 1 lac crore per month as tax collection ) for the Indian economy but its implementation is not much smooth. The traders are facing problems in getting the GST returns and their huge money is trapped in the hands of government which is affecting their business due to limited availability of resources.
4. Decline in investment
There is a 79.5% drop in the value of new projects announced during April to June 2019. This is the highest decline since September 2004. The value of declared investments in the same quarter is Rs 71,337 crore, which is also the lowest since September 2004. This is a big indication that industries are not yet confident in India's economic future.
5. Poor condition of banking sector npa-of-banks-india
As we know that Indian banking sector is passing through a very rough time since a long time. Total NPA of the Indian banks is around Rs 7.9 lac crore which is blocking the way of new loan to the other borrowers. The recent announcement of the mergers of the banks may further create the atmosphere of anarchy in the mind of the investors and depositors.
6. Agricultural crisis
Indian agriculture has been a key contributor to India’s growth story and continues to be one of biggest employers. It contributes around 15% in the Indian GDP and employs around 55% population of the country. But this sector is also passing through very rough time. Farmers are not getting adequate price for their crops that is why farmers are committing suicide throughout the country.
Around 12,000 farmers committed suicide in Maharashtra in the last 3 years. Now the farmers suicide rate is around 12.9 suicides per 100,000 in India.
So these 6 major reasons are behind the decline in the GDP of Indian Economy. I hope that the central government is striving hard to bring out the economy from this trap. Recently announced bailout package to banking sector, cut in corporate tax, cut in GST rate for automobile sector and other measures will produce the favourable results for the Indian economy.
How will decreasing GDP affect us?
Investopedia explains, “Economic production and growth, what GDP represents, has a large impact on nearly everyone within [the] economy”. When GDP growth is strong, firms hire more workers and can afford to pay higher salaries and wages, which leads to more spending by consumers on goods and services.
Firms also have the confidence to invest more when economic growth is strong, and investment lays the foundation for economic growth in the future. When GDP growth is very low or the economy goes into a recession, the opposite applies (workers may be retrenched and/or paid lower wages, and firms are reluctant to invest).
So finally as we can see that India right now is not in a good economic condition and lockdown has added to it. I just want to say that, government should take appropriate steps to bring back India's financial stability or else the situation is going to be in a way that we don't want.