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With worst likely behind, when will GDP growth reach 6%?

Growth for the second quarter came in better than expected at 5.3 percent, even as some economists were working with a sub 5 percent figure.

To discuss the GDP numbers, as well as when the Indian economy could see an appreciable pick-up in growth, CNBC-TV18’s Latha Venkatesh spoke with Arvind Virmani, Advisor to RBI, Member of the Technical Advisory Committee, Subir Gokarn, Former Deputy Governor of RBI and Research Head at Brookings Institution and Sonal Varma, Chief Economist, Nomura India.

All three experts believe that the trough of economic growth, logged in at below 5 percent over the past two years, has likely been seen. Here they discuss the various factors that could impact economic growth in the medium term ahead.

Below is the transcript of the interview on CNBC-TV18.

Q: 5.3 percent is better than what the street expected so looks like the worst is behind for the Indian economy in terms of growth?

Virmani: I recall that when the 5.7 percent number came in, in Q1, I had said that the growth for the next quarter will be less than 5.5 percent. So, in that sense less than 5.5 percent, 5.4 percent, 5.3 percent I am not surprised. So, as far as I am concerned I am still on track, we are still on track to my forecast which I gave after the Budget which is of 5.7 percent growth; plus, minus usual 0.25 let us say. So, in that sense it is good news as far as I am concerned.

Q: Is there any specific disappointment? A large amount of growth has come from government, community social personal services has given 9.6 percent. Is that sustainable with the tax revenues being so poor, this will fall in the Q4, isn’t it? So, would you have to revise your overall number?

Virmani: Two concerns remain which were already in some sense flagged by the IIP data which came out recently. One is on manufacturing as you mentioned. The rate of recovery in manufacturing is not fast enough and we have to see this in the context of global excess capacity in manufacturing, the very slow and constant downward revisions of global growth. So, this is a big concern and this will link up to issues connected with reforms.

Second part is as you again pointed out, the investment recovery. There is no investment recovery and that links to this issue of the gap between the financial which we are seeing in the stock markets and the gross fixed real investments. So, that gap is getting wider and wider so it clearly remains a big concern for policy again.

Q: What have you made of the GDP numbers, does it indicate that the worst is over or are we going to get something pathetic for the third quarter, does it indicate that at least there is future growth sometime soon?

Gokarn: The one thing that I want to highlight is that this is a tale of two halves. The performance of economy in the first half I don’t think is going to be a very effective predictor of the performance of the economy in the second half and the main reason for that is the very dramatic decline in oil prices that we have seen in the last few months.

In the first half, we do see signs of some emergence from the bottom — no question — when we compare it to the last year, when it 4.7 and 5.2, in comparable quarters we are at 5.7 and 5.3. So, roughly 5.5 growth in the first half. When we look ahead we are really going to see a very different environment. For one thing the macro situation with inflation, with the current account deficit narrowing particularly because the pressure from oil is going to be substantially lower and the fiscal deficit. Everything else remains the same, the reduction in oil prices is going to have a bearing on the fiscal situation.

All of this creates a very different backdrop for anybody looking at expanding capacities. As Arvind just said, there is an excess capacity situation both in the country and globally in many sectors so I don’t think we should be expecting an investment revival any time soon but we need certain preconditions to be established for the investment to recover and one of them — there is the other one which I will come to — one of them is sustained margin expansions.

If we see margins going up, corporate margins, profit margins going up over the next two or three quarters which I expect will happen because commodity prices particularly energy prices will soften then we have the preconditions for an investment recovery some time during the course of next year.

The second one is obviously the monetary policy stance as and when we start to see interest rates coming off, that should add further stimulus. When that is going to happen and at what pace I am not going to speculate but the inflation scenario being what it is obviously as most people are expecting some time during the course of next few months we should see the cycle turn.

So this is really creating conditions for investment recovery perhaps in the second half of calendar 2015 and that is the story looking ahead, I don’t think we should be too concerned about the story looking back.


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