India’s economy is finally catching up on speed. In the first quarter of this fiscal, economic output has grown by 5.7 percent, the fastest in nine quarters, fastest since the quarter ended March 2012.
Growth has come from all sectors. Agriculture is up 3.8 percent, still reflecting the good rabi harvest of last year. More importantly, manufacturing has picked up to grow at 3.5 percent; for the past 8 quarters manufacturing was contracting in India.
Besides manufacturing, electricity at 10.2 percent and mining at 2.1 percent have also shown decent traction compared to previous quarters. The disappointment came from services. Trade, hotels, transport and communication, that big service sector category that accounts for 25 percent of the gross domestic product (GDP), grew by 2.8 percent – slower than most of the previous 10 quarters.
Construction, a big employer of casual labour grew by 4.8 percent, not very good, but better than its record in the previous ten quarters.
Financial services grew well at 10.4 percent but that remains an enigma. For the past many quarters, finance has been growing at near 10 percent while the real economy grows at half this pace.
Looking at GDP from the demand side, private consumption grew by 5.6 percent in the April-June quarter, not very different from last year. But the good news is that gross fixed capital formation has grown by 7 percent, much better than the contraction of 2.9 percent last year same quarter.
A panel consisting V Srinivasan, Executive Director -Corporate Banking at Axis Bank, Dr. Arvind Virmani, Former Chief Economic Advisor and Currently Advisor to the Reserve Bank of India (RBI) and Sajjid Chinoy, the Chief India Economist at JPMorgan discuss if India is on the path of persistent growth.
Below is the edited transcript of the discussion:
Q: What is the sense you are getting? This is the best number in nine quarters, manufacturing, a sector you will be servicing, has grown at 3.5 percent not good in itself but best in 10 quarters, are you getting signs that things are ticking?
Srinivasan: That is the enigma; the GDP number i.e. clearly the headline number has come much higher than what we have seen in the past largely to some extent, driven by index of industrial production (IIP) and manufacturing. If you look at bank credit as such, bank credit has been slower than what it was last year. The puzzle is growth seems to be coming back or at least showing signs of coming back but if you look at the actual activity on the ground or what banks are seeing in terms of overall system growth of credit, it seems very lower than what it was last year.
Q: Have you had this experience in the 2003 period when again the economy showed that traction from five years of slowing to picking up speed, usually at this time is it that corporates normally manage their cash better?
Srinivasan: Yes, there should be some amount of operating leverage as things have been slower and as things start coming back, operating leverage is something which corproates would have and therefore you could have a period by which credit demand can be slow even though activity level sort of perk up.
But even in terms of pick up, in terms of working capital and related activities, I would still think activity on the ground has not shown the sort of trend which this number is showing. So we need to watch it for a few more at least the next quarter before we jump to a conclusion of whether it is sustainable because as you said whether it is agriculture or whether it is IIP, I think we are – one is on account of rabi in terms of overflowing to Q1 and also on industrial growth we are coming from a low base. So the numbers are good, the numbers at least give some room to cheer but whether we can say, we have crossed the hump, I think we need to watch it for at least another quarter.