What is GDP? How It Impacts the Banking Sector, Investments, and Your Financial Future

GDP (Gross Domestic Product) represents the total value of all goods and services produced within a country in a year. It acts as a measure of economic health. A rising GDP means the economy is growing, while a falling GDP signals economic trouble.

How GDP is calculated

In India, GDP is calculated quarterly and annually by the Ministry of Statistics and Programme Implementation (MoSPI). It considers four key factors:

1. Consumer spending – What people spend on goods and services.
2. Government spending – The money the government spends on projects and services.
3. Net exports – The difference between exports and imports.
4. Total investment – The money businesses spend on expanding their operations.

Types of GDP

Nominal GDP: Nominal GDP calculates economic output using current market prices. It does not adjust for inflation. This means if prices increase, GDP also rises, even if actual production has not changed. Nominal GDP is useful for comparing economic performance within a single year.

But when comparing different years, it may give a misleading picture because inflation affects prices.

Real GDP: Real GDP adjusts for inflation, providing a more accurate measure of economic growth over time. It reflects the true increase in goods and services, independent of rising prices.

For example, if nominal GDP rises by 10% but inflation is 5%, real GDP growth is only 5%. This gives a clearer picture of actual economic progress.

GDP Per Capita: GDP per capita divides a country’s total GDP by its population. It shows the average income or productivity per person and is used to compare living standards between countries.

A high GDP per capita usually means better living conditions, while a low figure suggests lower incomes and weaker economic progress. 

Why GDP matters

Even if you are not an economist, GDP affects your everyday life. It influences:

• Job availability: A growing GDP leads to more job opportunities.
• Salary growth: A strong economy increases wages and benefits.
• Cost of living: If GDP slows, inflation may rise, making daily essentials expensive.
• Loan and interest rates: Banks decide lending rates based on GDP trends.

How GDP affects the banking sector

India's banking system is closely tied to GDP performance. When GDP rises, banks benefit in several ways:

1. Higher credit demand: Businesses expand, and people borrow more for homes, cars, and education. This increases bank profits.
2. Lower loan defaults: A strong economy means more people can repay their loans, reducing bad debts for banks.
3. Better investment in banking stocks: A booming economy attracts investments in banking stocks, improving financial markets.

What happens when GDP declines

• Banks struggle to recover loans.
• Interest rates may rise, making borrowing costlier.
• Fewer people take loans, slowing bank growth.

The RBI keeps a close watch on GDP trends to adjust interest rates and monetary policies.

Impact of GDP on investments

For investors, GDP growth is a crucial factor. Here's how it influences different investment options in India:

Stock Market

• When GDP is strong, companies perform well, pushing up stock prices.
• Foreign investors show confidence in India’s economy, increasing capital inflow.
• Sectors like banking, IT, and infrastructure flourish, giving better stock returns.

During a slowdown

• Stock prices drop as company profits decline.
• Investors withdraw money, creating market volatility.
• Defensive stocks (FMCG, healthcare) perform better as people still buy essentials.

Real estate

• A growing economy leads to high demand for homes and offices.
• Lower interest rates make home loans affordable.
• Property prices rise, giving better returns.

During a downturn

• Fewer buyers can afford homes.
• Loan interest rates may increase, making borrowing expensive.
• Developers face delays in selling properties, slowing construction.

Mutual Funds

• Equity mutual funds perform well when GDP is strong.
• More money flows into mutual funds due to a positive economic outlook.
• Debt funds gain when GDP slows, as investors look for safer options.

GDP and your financial future

Understanding GDP helps you make better financial decisions. Here’s how:

1. Savings and investments – In a growing economy, invest more in stocks and equity mutual funds. During slowdowns, shift to fixed deposits and gold for safety.
2. Borrowing and loans – When GDP is strong, loan interest rates are lower. It’s a good time to take loans. If GDP slows, banks may raise rates. Delay borrowing if possible.
3. Job and career planning – A booming GDP creates jobs in IT, banking, and manufacturing. In a recession, focus on job security rather than switching frequently.

This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.