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- The contraction in India’s gross domestic product (GDP) was predicted.
- A big fall, in tune with the rest of the world’s economies, was expected.
- But that almost a quarter of the GDP would be shaved off in the first quarter of financial year 2021 is a shock.
What caused GDP contraction?
- In any economy, the total demand for goods and services — that is the GDP — is generated from the four engines of growth.
- The biggest engine is consumption demand from private individuals like you.
- GDP = C + I + G + NX
- Private Consumption accounted for 56.4% of all GDP.
- 2nd biggest engine is the demand generated by private sector businesses. It accounts for 32%.
- 3rd engine is the demand for goods and services generated by the government. It accounts for 11%.
- The last engine is the net demand on GDP after we subtract imports from India’s exports. It is the smallest engine.
- The two biggest engines, which accounted for over 88% of Indian total GDP, Q1 saw a massive contraction.
- Net export while on paper, provides a boost to overall GDP, it also points to an economy where economic activity has plummeted.
- The two biggest engines, which accounted for over 88% of Indian total GDP, Q1 saw a massive contraction.
- Net export while on paper, provides a boost to overall GDP, it also points to an economy where economic activity has plummeted.
Its implication
- With GDP contracting by more than what most observers expected, it is now believed that the full-year GDP could also worsen.
- A fairly conservative estimate would be a contraction of 7% for the full financial year.
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