In 2023, India reported a GDP (i.e., Gross Domestic Product) of $3.75 trillion, making India the 5th largest economy in the world (Source: Forbes). This was a recorded growth rate of 7% for the Indian economy (Source: World Bank).
The number is huge, 7% is great, and 5th place on a global scale ain’t too shabby (😎)! But – you won’t really know what this means for our economy against global benchmarks without first understanding GDP a little better!
Most textbooks define the Gross Domestic Product or GDP as the total value of all final goods and services that are produced in a country – in a fixed period of time, and within the borders of that country. It is typically indicative of how well the economy of any country is doing.
Let’s understand this at a micro level before we can look at what this means for the country –
Consider a pizza place that needs to evaluate its monetary performance in a year. The restaurant owner will have to account for four key things –
The amount you get at the end of these calculations will leave you with the GDP of this pizza place. It will allow the restaurant owner to determine how his business has performed in a specific period.
Similarly, a country’s GDP is also incumbent on all its revenue (income) and expenses.
Let’s take a look at an example to understand the GDP formula on a macro level –
GDP = C + I + G + (X-M)
The GDP of a country adds up all the economic activities within a country’s borders to give a measure of the overall economic performance and size of that country’s economy. Think of it like a report card that helps economists and policymakers understand how well a country’s economy is doing.
So, when we say India’s GDP was $3.75 trillion, we mean that the consumption, investment, government spending, and exports (minus imports) in India were collectively valued at $3.75 trillion. To understand how the country attained such a huge GDP this past year, you need to know a bit more about the elements that influence a nation’s GDP.
Factors Influencing GDP
Consumption, investment, government spending, exports, and imports obviously influence the GDP. The higher these factors are valued (minus the imports!), the higher the GDP of a country will be.
Understanding these factors is pretty simple – did we really need another subheading for this?
Well, yes. While these five factors are easy to understand, we want you to also know about three important underlying factors that influence these five – ergo, the three underlying factors that ultimately influence the GDP. Let’s see what these are, and how they might have contributed to India’s staggering GDP this past year (or how they might affect its GDP going forward) –
In addition to these three factors that have a very clear and tangible impact on a country’s GDP, factors like inflation, economic and political policies, and even global economic conditions have a role to play. Remember, the higher the GDP of a country, the larger its economy is considered to be.
Today, India’s economy is being boosted due to growth in sectors like IT, services, agriculture, and manufacturing. The domestic Indian market is benefiting from its young market (you!) of buyers, a growing middle class (the savers and investors!), and innovation in technology being facilitated in our country.
India’s global GDP ranking is a testament to how the country is growing, and the fact that a steady (if not increasing!) growth rate is projected for the country’s GDP in the coming years is an indication of just how much the economy is poised to grow in the future!