Why isn't the chain on the rear gear in biggest cog for lowest gear
You rear derailleur is probably just adjusted improperly. The indexing adjustment lines up the derailleur with each sprocket. Your's is so far out that when the shifter shows 1, the chain is on sprocket 2. The grinding noise is because the derailleur is trying to push the chain onto sprocket 1 but cannot move quite far enough.

The Park Tool company has great articles and videos that provide step by step procedures for both rear and front derailleur adjustment. Follow those and see if that fixes the issue.

Some other observations:

Your rear quick release is in backwards. The lever should be on the left side of the bike. If it's on the right side it may interfere with the derailleur. Also you may not be able to close it properly with the derailleur in the way.

You should also trim and re-cap the derailleur cable. The long cable end you have now could catch between the sprockets and chain, or in the derailleur cage which could jam the drivetrain and throw you off the bike.