GDP growth contracts -23.9% in India ( Q1 ), What is the economics behind the math?

India's April-June quarter saw a massive 23.9 percent (YoY) contract to GDP (Gross Domestic Product), the first contraction of GDP in more than 40 years. According to the National Statistics Office (NSO), gross value-added (GVA) came in at -22.8 percent.

GDP in Q1

India GDP Q1 data: Demand from private business and individual citizen the fall in Q1, an increase in government’s demand made up for just 6% of the drubbing.

The total value of goods and services produced in India in April, May and June this year is 24% lower than the total value of goods and services produced in India in the three months of last year.

Worse is that due to extensive lockdown, data quality is sub-optimal and most observers expect this number to deteriorate further when it is revised in due time.

Chart 1: India’s GDP story since economic liberalization. .

Chart 2 turns out, almost all the major indicators of growth in the economy - be it cement production or steel consumption - show deep contraction. The quarter also saw a contraction in total telephone subscribers.

Chart 2 - Show change percentage in Key Indicators

What is the biggest implication?

With GDP contracting higher than most observers expect, it is now believed that full-year GDP may also deteriorate. A fairly conservative estimate would be a contraction of 7% for the entire financial year.

What is the reason for GDP Contraction? And why hasn't the government been able to control it? 

In any economy, the total demand for goods and services - which is GDP - arises from one of the four engines of growth.

The first most important engine is the demand consumption of private individuals like you. Let's call it C, and in the Indian economy, it had 56.4% of all GDP before this quarter.

The largest second engine is the demand generated by private sector businesses. Let's call it I, and it is 32% of all GDP in India.? Why has the government not been able to curb this?

The third one engine is the demand for goods and services produced by the government. Let's call it G, and it is 11% of India's GDP.

The last engine is the net demand on GDP after subtracting imports from India's exports. Let's call it NX. In the case of India, it is the smallest engine so this engine not effect on GDP.

Chart 4 shows: What has happened to all engines in Q1 and how to GDP growth contract -23.9%.

Chart 4: Engines of Growth falter

Private Consumption -  is the first biggest engine that has fallen in money term Rs. -5,31,803 Crore over the last year quarter.

Investment by business - is the second-largest engine, its the half of this year quarter of the last year quarter.

So these two most important engines, which accounted for over 88% of Indian total GDP, Q1 saw a massive contraction

In the last, All charts show the economics behind the math and how to GDP growth contracts -23.9%

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