What causes GDP contraction? Why hasn’t the government been able to curb it?
In any economy, the total demand for goods and services — that is the GDP — is generated from one of the four engines of growth.
The biggest engine is consumption demand from private individuals like you. Let’s call it C, and in the Indian economy, this accounted for 56.4% of all GDP before this quarter.
The second biggest engine is the demand generated by private sector businesses. Let’s call it I, and this accounted for 32% of all GDP in India.
The third engine is the demand for goods and services generated by the government. Let’s call it G, and it accounted for 11% of India’s GDP.
The last engine is the net demand on GDP after we subtract imports from India’s exports. Let’s call it NX. In India’s case, it is the smallest engine and, since India typically imports more than it exports, its effect is negative on the GDP.
So total GDP = C + I + G + NX
Now look at
Chart 4. It shows what has happened to each of the engines in Q1.
Chart 4: Engines of growth falter. Source: MoSPI and Express Research GrOup
Private consumption — the biggest engine driving the Indian economy — has fallen by 27%. In money terms, the fall is of Rs 5,31,803 crore over the same quarter last year.
The second biggest engine — investments by businesses — has fallen even harder — it is half of what it was last year same quarter. In money terms, the contraction is Rs 5,33,003 crore.
So the two biggest engines, which accounted for over 88% of Indian total GDP, Q1 saw a massive contraction.
The NX or the net export demand has turned positive in this Q1 because India’s imports have crashed more than its exports. While on paper, this provides a boost to overall GDP, it also points to an economy where economic activity has plummeted.
That brings us to the last engine of growth — the government. As the data shows, government’s expenditure went up by 16% but this was nowhere near enough to compensate for the loss of demand (power) in other sectors (engines) of the economy.
Looking at the absolute numbers gives a clearer picture. When the demand from C and I fell by Rs 10,64,803 crore, the government’s spending increased by just Rs 68,387 crore. In other words, government’s spending increased but it was so meagre that it could cover just 6% of the total fall in demand being experienced by people and businesses.
The net result is that while, on paper, government expenditure’s share in the GDP has gone up from 11% to 18% yet the reality is that the overall GDP has declined by 24%. It is the lower level of absolute GDP that is making the government look like a bigger engine of growth than what it is.
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India's consumption is back to normal in July and so is private investment. So I expect next quarter to be low negative and positive in subsequent 2 quarters.
This is for noobs who don't get it.
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