When we are appearing in interview for a job, the interviewers have limited time in which they make up their mind to select or reject a candidate - you. One of the qualities they look for is how well a candidate is aware of his / her surroundings – local / national / global issues affecting business / social enterprises. It is in this background that I would like to talk to you on an issue of national / global importance. In fact after the financial crisis, issue of economic growth / stability has assumed a lot of relevance and hence importance in economic well-being’s of all of us.
India’s growth story has also been attracting a lot of attention world over. Recently our GDP (Gross Domestic Product) has recorded a growth of 8.8% in Q1 of 2010-11 which was fastest in last 10 quarters. It was higher by 2.8% as compared to last year same period. Planning commission deputy chairman Montek Singh Ahluwalia expected that GDP growth in this fiscal year will be slightly better than 8.5% as projected earlier.
At the same time some experts and the economists have expressed a cautious approach to growth number. There are three factors which have a bearing on overall performance of any economy namely Private consumption, trade deficit (import > export) and investments. All three numbers are down as compared to the last year same period and also against the previous quarter. Perhaps you may all think it at odds with consumption trends seen in autos, durables and others.
Objective of this blog is to relate theory of GDP to real life business situation as was experienced in the Q1 in India and for that matter the application will equally be seen in any economy of the world; So that we as managers may develop a better understanding and appreciation of the issues.
If you had studied GDP concepts at school/ college/PG levels or are going to study in PG course, GDP equals Money times velocity.
GDP=MxV
M= Supply of money and V= No. of times a unit of money changes hands during a year.
It means GDP is function of money & velocity.
1. If both are going up, the impact on the economy will be favourable,
2. If both are going down, then impact will be unfavorable,
3. If the supply of money has gone down and no change in velocity, impact unfavorable and
4. If the supply of money has gone up but velocity has gone down faster than the rate at which M is rising, the impact will be unfavorable.
What have we seen in the last 18 months in our country and also around the world? The governments and central banks have been taking steps to increase supply of money and to keep rate of interest low. But despite that economies of many countries are faltering. Why?
It means that velocity is most important factor.
a. If people is not spending money (changing hands), it will slow down wheels of economic growth- multiplier effect.
b. If import is more than export, disposable income declines.
c. If businesses are making profits and are keen to invest, it will provide impetus to economic activity
It is for the aforesaid reasons we need to read carefully economic performance of Indian economy in Q1 and tread cautiously as business managers.
I am deliberately ending the blog at this point inviting your views and understanding of the concept. I request you all to try explaining reasons and relate it to the happenings in India and the world.
I look forward to receiving your comments.
Best wishes!
