GDP for the first quarter is negative but share market is recovered to the level of pre lockdown. If the economy is declining, why share market is recovering?

In the last week, we have read that Indian economy has reported negative GDP of -23%. At the same time during the last 6 months, we have also read about the recovery of the share market. My inquisitive readers are definitely questions like

1.       If there was no production or service activity in the economy, how share market is recovered?

2.       If the share market is rising in spite of the nil activity, does it mean that there is no relation in the GDP, economical activities and share market trend?

Let’s understand the meaning of the GDP i.e Gross Domestic Product in the simple manner.

GDP at market prices = GVA at basic prices + Product taxes- Product subsidies

From the above equation, it’s very important to understand the meaning of GVA for understanding the concept of the GDP apart from taxes and subsidies part

Gross value added is the measure of total value of goods and services produced in the economy. In simple words, its value of the net output from the goods and services after adjusting the value of goods and services (intermediate) used for having the final output.

Let’s analyze the GVA with data given by MOSPI

Table 1: Gross Value added and Quarterly comparison

Quarterly Estimates of GVA at Basic Prices in Q1 (April-June) of 2020-21				April - June
Particulars	2018- 19	2019-20	2020-21	2019 - 20	2020 - 21
Agriculture & Forestry & Fishing	427,177	439,843	454,658	3.00	3.40
Mining & Quarrying	88,634	92,807	71,209	4.70	(23.30)
Manufacturing	561,875	578,936	351,396	3.00	(39.30)
Electricity, Gas, Water supply & other utility	74,998	81,628	78,577	8.80	(7.00)
Construction	249,913	262,868	130,750	5.20	(50.20)
Trade hotels, transport, Communication & Services related to broadcasting	609,330	630,860	334,284	3.50	(47.00)
Financial, real estate & Professional services	757,850	803,322	760,491	6.00	(5.30)
Public administration, Defense and other services	387,589	417,483	374,656	7.70	(10.30)
GAV at Basic Price	3,157,366	3,307,747	2,556,021	4.80	(22.80)

*MOSPI

It can be seen that all the Gross value added (Output) of all the sectors are increased at the declining rate as compared to the previous. Agriculture sector has expanded by 3.4% as compared to the last year. Overall output of the manufacturing, transport, hotel and construction sector has been shrunk by roughly 50%. From the above picture, we can say that this is the highest slump in the productivity in the 21^st century.

On the other hand, we are getting the news about the share market recovery from the month of May on various news channels and newly evolved informal source of information “Whatsapp University” as well.

One question may arise in mind, how both the things are operating simultaneously in the exact opposite direction. It is necessary to analyse the share market data for reasoning with the unbiased mind.

Many researchers consider the NIFTY50 as growth indicator of the economy as a representative of the organized sector. I have downloaded the NIFTY50 Index prices from March to June for the year 2019 and 2020. Data for the same period from two different horizon will help us to understand the Index prices before and during the pandemic situation. Index prices are converted to the weekly average for the better presentation.

In the first week of the March 2020, we were reading the news of pandemic situation from around the globe but lockdown was not started in India. It observed that the index price of the NIFTY was in the lower end in the same week as compared with the year 2019 by 10%. Huge downfall was observed in the 3^rd and 4^th week in the month of March 2020, after announcement of the lockdown and continued for the several weeks in the melancholy environment.

In the last week of the June 2020, NIFTY 2020 was recorded at 10,302 as against 11,788 of last week of June 2019. We can observe that index was just 13% lower than the previous year in spite of 3 months lockdown in the 2020 as against full production of 2019.

It’s obvious that you can ask above two questions again after understanding the all mentioned data.

1.       If there was no production or service activity in the economy, how share market is recovered?

2.       If the share market is rising in spite of the nil activity, does it mean that there is no relation in the GDP, economical activities and share market trend?

It’s difficult to answer in once sentence but one can get the rough idea by making the concepts clear about the basic concepts of the economical variable and share market.

1.       If you are analyzing the economic data or any figures, it always shows the current figures or the past trend of that particular variable. Share market reflects the future. When the investors always plan the moves in the market based on the information about future. Current Index Prices shows the expected future of the economy. In simple words, When the investors were confident about the opening the economy, wave of optimism hit the share market resulting into the recovery of the market.

2.       Gross Value Added considers the output of the organized and unorganized sector. On the other hand, share market gives the picture of companies which are listed. Share market can be called as the representative of the organized sector. In simple words, we can say that share market is the part of the economic performance. Therefore, one can expect the price corrections in the share market based on actual figures in the near future.

3.       In the last blog, we have seen that share market comprises of the thousands of companies listed on NSE and BSE. NIFTY50 and Sensex are just representative of the share market. It is necessary to analyse the performance of the other companies also to understand the actual trends in the share market than only relying on the representative index for increasing the accuracy of the conclusion.

4.       Around 1.2 million D-mat accounts were opened in the March and April resulting in the increase in the intraday trading by 53% (As per the reputed Newspaper). Speculation or the need of the supplement income can be the two reasons behind the sudden rise in the number of the D-mat accounts.

If you are well versed with Regional language of Maharashtra, you can read the above blog in Marathi by clicking the following link

https://managingrupaya.blogspot.com/2020/09/gdp.html