It is a standard question in all finance classes. The teacher asks “What is GDP?”

The students answer in chorus ” Gross Domestic Product.“

And the teacher goes ” That’s the full form, but what does it mean?”

No one knows.

Finally we learn what GDP really means. GDP is the market value of all the final goods and services produced within a country during a certain time period. Once you understand the meaning of GDP, you appreciate the importance of the GDP growth rate. It is a measure of a country’s well-being.

India has been projected as one of the fastest growing economies for the next 2 years by the IMF at the current World Economic Forum at Davos. For the world on the whole a slowdown has been predicted but still far from a full-fledged recession.

The IMF has lowered the global growth rate for 2019 & 2020 to 3.5% & 3.6% respectively, citing a slowdown in the advanced economies, decline in growth rate in  economies of Argentina and Turkey, impact of trade actions on China, Germany following the new automobile emission standards, sovereign and financial risks in Italy, “no-deal” withdrawal of UK from the EU, slow down in China etc.

The IMF has projected a GDP growth rate of 7.5% for 2019 and 7.7% for 2020 for India. China has announced that its GDP growth rate for 2018 was at a 28 year low of 6.6% (last in 1990) and IMF has predicted the growth rate to be still lower in 2019 & 2020 at 6.2%.

There are two types of GDP growth rates – real and nominal. The figures projected here are the real GDP growth rates. The nominal GDP growth rates will include the inflation rate also. The nominal GDP growth rate is a thus proxy for forecasting the growth of the companies contributing to the economy. And the growth rate of the companies in turn is important in estimating the growth of equity.

The high GDP growth rate projections is good news for the equity investors in India as we are bracing for a year of volatility in 2019 due to the upcoming Lok Sabha elections. But the show must go on. In the next month ie on 1 Feb 2019, the Finance Minister will present the interim budget. Another set of numbers to look forward to.

Till next post, take care.