GDP growth rate has declined and that has come following ongoing economic slowdown. The facts are not encouraging but, more important is the analysis of cause & effect for declining GDP growth rate as well as economic slowdown. Why is it so? Here’s a story to explain the same.
A handsome guy was quite concerned about his health. He once went for a regular check-up and found that his blood-pressure (BP) was getting low. He came back home and started thinking about his problem. He was shocked about the fact that his BP had gone low even after taking immense care of his health. “I can’t take this!”, he thought to himself in stress. In desperation to cure himself faster, he took an overdose of the prescribed medicine for low BP.
After a few days, he again went for a check-up to see if his problem was cured. He was happy to know that his efforts had worked and his BP wasn’t low anymore. But, due to stress and medicinal overdose now his blood-pressure had shot way higher than normal! So, now he had to undergo treatment for high BP.
Moral of the story – In a crisis situation, hold your nerve, think thoroughly and then react. Desperate measures to cure anything usually lead to additional problems.
There’s a reason behind narrating the above story. We know that the GDP growth rate numbers are not encouraging for investors but, they can at least avoid bigger unforeseeable problems (later discussed in the article).
About our GDP Growth Rate
Q2 results of Indian GDP growth rate were announced a few days back after consistently reviewing economic slowdown, and entire media was buzzing with economic data (and that’s still going on). People are really concerned with the 4.5% growth rate but they are actually confused about the repercussions.
First things first, a normal consumer doesn’t have much to do with the GDP growth rate. So putting it in a simple way, just because a lower growth rate is announced you won’t stop consuming the products and services that you normally do. Would you? This has more to do with the investors whose money is on line and also their wealth creation is directly proportional to the growth in economy.
What is causing the Slowdown?
Time for an Economics class! The GDP growth rate is directly dependent upon the difference of exports and imports. In our case, there was an additional factor besides slump in consumption expenditure and negative growth in exports for slowing GDP. Our government missed the fiscal deficit target (difference between total revenue and total expenditure by government) which majorly contributed to the decline.
The Bigger Picture
Investors are of course bewildered by this steeply declined growth rate (which is backed by economic slowdown). This will in turn push them to get carried away with the market sentiment and withdraw their holdings. But, if a large number of investors think this way, it’s going to be a big problem. Here’s how.
You must have read in recent times that market is beating the economy and is at an all time high even thought the economy is slowing down. Now, when the growth rate has been announced, if investors start withdrawing, there would be excessive selling. This might result in a market crash!
What to do Now?
Remember the moral of the story we shared in the beginning of this newsletter? That’s exactly what we need to focus on. Investors shouldn’t panic and shouldn’t act desperately. We know it’s easier said than done but, that’s how it is. Slowing GDP growth is not good but, a market crash additionally would be worse! So, here’s something that can be followed. As they say “Nothing is permanent, let the bad times pass by. It’s all going to change one day.”
By the way, GST collections by government have been reported at an all time high. So, maybe some positive effects of the same on the economy are not that far away.