Tag: India GDP

Indian services growth slows in January as new business slips to four-month low

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Growth in India’s dominant services sector weakened for a second month in January but firms accelerated hiring despite waning demand, a private survey showed on Tuesday.

The Nikkei/IHS Markit Services Purchasing Managers’ Index declined to a three-month low of 52.2 in January from 53.2 in December, but remained above the 50 mark separating growth from contraction for an eighth month.

“There is some sign that growth may run out of steam, in the short-term at least, as seen by the weakest improvement in demand for four months and relatively subdued optimism,” said Pollyanna De Lima, principal economist at IHS Markit.

“Should data for services carry on a downward path, we could see a slowdown in GDP expansion in the final quarter of fiscal year 2018.”

Weaker growth in domestic demand, dampened by sharper price rises, offset a rebound in foreign sales and dragged a sub-index tracking new business orders to its lowest since September.

That, alongside uncertainty over the outcome of a national election due in May, pulled down optimism about future activity to a three-month low.

Yet firms increased staff levels at the fastest rate in three months, partly on expectations of increased business after the elections and possibly reflecting resilience in manufacturing activity.

“The good news came from the Indian labour market. Job creation at service providers was among the strongest seen for the past seven-and-a-half years at the start of 2019,” added De Lima.

“The increasing willingness of companies to hire workers should help reduce still high levels of unemployment in the country.”

A composite index, taking into account both manufacturing and services activity, remained unchanged at December’s 53.6, helped by an unexpected acceleration in factory activity.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Budget 2019: End the smoke-and-mirrors accounting, ring in transparency

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Our successive budgets have always followed accounting and disclosure standards that are – to put it mildly – misleading.

When the interim finance minister presents the interim budget, he will likely show that the government has largely achieved its fiscal deficit targets.

Analysts will politely applaud, and then debate the extent of “innovative” accounting involved. After all, the government’s total receipts are well short of budgets. Real expenditures are higher than budget. It follows that the true fiscal deficit must be higher than budget.

The government will deploy creative accounting solutions around this. It will magically convert borrowings by government owned entities into lower expenditure at the central level. It will transfer money from its left pocket to its right and show a net receipt to itself. And since it follows cash accounting, it will simply delay paying out expenses and refunds, to show lower expenditures and higher revenues.

The government will deny or ignore speculation about the scale of the subterfuge – which one fears could be as high as 1 percent of GDP. It will correctly point out that it is doing nothing different from what previous governments have done – though the extent will be a matter of debate.

The best way to end speculation about one’s books would be to adopt better accounting standards. The government itself rightly demands these better standards from businesses in India. The fact that successive governments have balked at doing that should make us worry about the true extent of our accounting hole.

Borrow and Pray

Even through these tinted accounting lenses, the quality of our fiscal spending looks questionable.

If we’re growing at 12 percent and can borrow at 8 percent, borrowing and investing is actually a good idea. We needn’t worry too much about fiscal deficits then, as long as we are putting the borrowed money into education, roads, irrigation and other productive investments.

The tricky bit is that we are not just borrowing to invest. We are borrowing – a lot – just to pay our current bills. Our spending on current expenses such as interest payments, salaries, pensions, government schemes etc. alone are well in excess of our revenues.

This difference – the “revenue deficit” in fiscal parlance – is actually rising the past three years and could top 3 percent of GDP this year.

It feels like we’re consuming beyond our means now, in the hope that our children will live up to their promise and pay off our debts.

As a corollary, it feels like we are not investing enough in our children’s future – unless you make the very debatable argument that any form of spending now is good for our children.

The Shiny New Toys

Rather than debate transparency and quality of the budget, in the recent past, we economists and academics have shown our politicians even more shiny new toys.

We have suggested that one way to help the poor in our country is to hand over money to them. Of course, we have also pointed out that they would have to cut down on other expenditures, but we aren’t sure if anyone has heard that bit.

We have suggested that we don’t need to monitor how much the government borrows just to pay current expenses such as salaries, pensions, and interest payments. In other words, there now isn’t a revenue deficit target that the government has to adhere to.

We have suggested that the RBI balance sheet has a magic lamp waiting to be rubbed.

We have set up a system where the RBI can step in to helpfully buy large amounts of government bonds whenever there is a flight of capital from the country, without any debate around the consequences.

If we look past the bells and whistles that accompany all this, we might find that our core recommendations are to simultaneously borrow more money and print more money.

Idi Amin would be pleased.

The Real Debate Needed

Maybe borrowing and printing money could actually work. Genuinely. After all, inflation is low, growth is sputtering, crude oil prices are (fingers crossed) manageable, and the global context is comparatively benign. Perhaps government spending and some printing of money is what is needed to kindle India’s animal spirits. Maybe this time is different.

On the other hand, maybe not. Maybe we risk a repeat of the past, when large government spending inevitably caused macroeconomic vulnerability, inflation, twin deficits and financial instability.

Maybe there still is no such thing as a free lunch.

These are real questions that need to be debated and answered. Instead, we are preoccupied with our shiny toys, and could be on the verge of a huge economic gamble, unsure of the outcomes.

Truth & Discipline

The chapter of the Economic Survey of 2016-17 that dealt with the idea of Universal Basic Income (UBI), speculated that the Mahatma might have been conflicted with the idea of UBI, but that on balance, he might have given the go-ahead.

One aspect the Mahatma would have been totally against is the pretense that accompanies our budgets. Besides the moral dimension, there is no point in keeping up a pretense when everyone knows there is one. By continuing with status quo, we only spur dangerous speculation about how ugly the truth might actually be.

It is time we moved decisively towards better transparency in our government books of account. It is time we have a bipartisan, independent oversight of the budget along the lines of the Congressional Budget Office in the United States.

Only when we know our true economic status can we truly contemplate and debate our shiny toys.

At a time when our politicians are hurtling into a spiral of competitive populism, we need the checks and balance of truth and discipline.

Ananth Narayan is Associate Professor-Finance at SPJIMR. 

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Despite positive macros, corporate earnings in India don’t seem to be improving: BNP Paribas

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Manishi Raychaudhuri, Asian equity strategist at BNP Paribas, spoke to CNBC-TV18 about the selloff in Asian equities and his stance on India.

“I think the sell-off that we are seeing in Asia is a combination of several things. First, the market has moved in sympathy with what happened in the US couple of days ago. Yesterday was a US holiday, so there are no indications from that side. Second, I think the market also got euphoric and maybe a little too soon about the so-called temporary truce in this trade war between US and China and over the next couple of days, the market has been trying to figure out what has been agreed upon because even the statements coming in from the two sides have been significantly different. Finally, I think after this rally – I wouldn’t quite call it a rally but possibly a recovery over past two-three weeks, various different parts of the market are coming to a realisation that the basic hypothesis of a growth slowdown or a synchronised slowdown next year that is not really behind us yet. We still have to face it. It may be difficult to pinpoint one reason at this point of time,” he said.

Talking about the US economic growth, Raychaudhuri said, “Compared to a 3 percent growth in 2018, we have a forecast of 2.1 percent in 2019 as far as US real gross domestic product (GDP) is concerned. A similar degree of slowdown in Europe as well but as it would appear to you that these are cases of a slowdown but clearly not a recession or a catastrophic slowdown.”

“When one looks at the consensus earnings estimates, the US has not suffered at all unlike Asia – consensus earnings estimates in the US have been strong, they have moved up consistently over the past one year or so. So I don’t think it is worth worrying about a recession in the US at this point of time,” said Raychaudhuri.

With regards to India’s economic growth and corporate earnings, Raychaudhuri said, “As you would recall, sometime in late June, we have downgraded India to neutral from an overweight and we are still holding on to that stance. India is a very curious picture of reasonably improving macro, we have seen growth improving notwithstanding the small disappointment that we had in the last quarter, we have also seen inflation steadily staying well below the Reserve Bank of India’s (RBI) reference range, which is also reflected in the RBI not hiking yesterday. We have also seen various other macroeconomic parameters improve over past couple of quarters but at the same time and rather curiously, the earnings environment, the corporate earnings estimates on a consensus basis, they don’t seem to be improving.”

“In fact, the last quarter was bit of a disappointment where the non-financial universe had single-digit, possibly low to mid-single-digit, growth in earnings and this phenomenon of earnings estimates continuing to drift down that we now have seen in India for one and a half years to two years unlike other parts of Asia. That is what India presents right now – the picture of improving macro but at the same time kind of a pedestrian micro or corporate earnings environment. We need to see an improvement in the latter before we get enthused about the Indian market as a whole,” he said.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

GDP growth eases to 7.1% in Q2 as election fever nears

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Gross Domestic Product (GDP) for the second quarter ended September 30, 2018, stood at 7.1 percent, as against 6.3 percent in the same period of last year. Although, the GDP softened on quarter-on-quarter basis (it was 8.2 percent in the first quarter of current fiscal), it’s rise over the last year’s growth numbers are a shot in the arm for Prime  Minister Narendra Modi’s government months before the general elections.

Gross Value Added (GVA) for the given period stood at 6.9 percent versus 6.1 percent in the corresponding quarter of last year. GVA in the first quarter of this financial year stood at 8 percent. However, this was the slowest GDP growth in three quarters.


source: tradingeconomics.com

CNBCTV-18 poll estimated GDP growth for the second quarter at 7.4 percent while growth in GVA was expected at 7.3 percent.

Analysts and industry experts said that the softness in GDP growth in the second quarter could be attributed to slower growth in India’s agriculture and industrial sectors.

Lead indicators like corporate sector operating performance was up between 9 and 10 percent in the second quarter while passenger car sales, domestic air traffic and cement production grew in double digits in the given three months.

These GDP numbers come in on the back of new GDP series data that the Central Statistics Office (CSO) released earlier this week. The government on Wednesday lowered the GDP growth rates for a majority of the previous 10 years of the United Progressive Alliance (UPA) regime, saying the data has been ‘recalibrated’ to reflect a more appropriate picture of the economy.

GDP growth for second quarter 2018-19 at 7.1% seems disappointing. Manufacturing growth at 7.4% and agriculture growth at 3.8% is steady. Construction at 6.8% and mining at -2.4% reflect monsoon months deceleration. Half year growth at 7.4% is still quite robust and healthy.

— Subhash Chandra Garg (@SecretaryDEA) November 30, 2018

The GDP growth rates for FY 2006-12 was revised using new back series data, chief statistician Pravin Srivastava said at a press conference.

As per the data released by the Central Statistics Office (CSO), the economy in 2010-11 grew by 8.5 percent as against 10.3 percent estimated earlier.

“It is a number which is far lower than market expectations and also our expectations,” said Soumya Kanti Ghosh, group CEA, State Bank of India (SBI). “The sense of 7 percent or sub 7 percent growth rate which we were expecting in Q4 of this year, may actually materialise sooner than that.”

We calculated the core GVA part which is basically index excluding the agriculture and the public sector, so the private part has actually significantly slowed down to 6.6 percent, Ghosh said.

It means that from 8.1 percent in Q1 it is down to 6.6 percent. So, there is a slowdown across the board, he added.

The drop in India’s growth rate to 7.1% is worrying. Two factors are driving this: The lingering effects of the demonetization & steady decline in savings and investment rates. Effort must be made to boost the economy’s investment-to-GDP ratio.https://t.co/x4OMB7MVK9

— Kaushik Basu (@kaushikcbasu) November 30, 2018

“We had a GDP forecast of 7.4 percent and this is definitely lower than that,” DK Joshi, chief economist, CRISIL.

There are two factors which are pulling the services down, one is the banking sector which is a significant part of the financial sector, and second is telecom in the trade, hotel, and transport segment, Joshi said.

“Unless the services sector turns around, I think the GDP growth will remain around 7 percent,” he added.

“The numbers are quite disappointing across the board. My numbers were significantly higher than these. I would say largely construction, public administration, and electricity were known to be buoyant and that has been the case,” said Upasna Bhardwaj, senior economist, Kotak Mahindra Bank.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Demonetisation: Goal posts continue to be shifted but the truth of its failure is blatant

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Two years after demonetisation was announced, it should be clear whether it achieved its stated goals. The unorganised component of the economy, which is 45 percent of the output and 93 percent of the employment, has been hurt. This has unfavourable consequences for society as a whole, even if the organised sectors do well.

From day one, this author predicted that demonetization would neither check the process of black income generation nor impact black wealth but would damage the economy if the note shortage continued beyond a month. Not only did the unorganised sector which works in cash largely shut down due to lack of working capital, even the organized sectors faced fall in demand. Institutions like the RBI and Cabinet functioning got damaged.

The Immediate Impact

CMIE data confirms that private investment fell sharply to almost half. Many unorganised sector workers migrated back to their homes in rural areas and sought work there. Demand for work under MGNREGS saw an upsurge as the sharply higher budget allocations suggest. They remain high even two years later, suggesting that workers have not returned since their units have not reopened. Credit offtake fell to a historic low, reflecting a decrease in output and investment.

The decline of the unorganised sectors impacts the demand for its own products. The largest component of this sector (in employment) is agriculture and it has faced a decline in incomes which has meant that the farmers are not able to repay their loans. Consequently, there have been large scale demonstrations by farmers demanding better prices and loan waivers. For months, normal banking work suffered —  banks were busy exchanging old notes for new ones. This impacted their profitability. Soon, the adverse economic situation led to an increase in NPAs also, adding to their pre-existing problems.

If the unorganised sector is factored into the calculation of GDP, the current rate of growth of the economy is less than 1 percent and not 7 -8 percent as the official data claims. The quarterly GDP calculations are based on the growth of the corporate sector, which does not fully reflect the organised sector and much less the declining non-agriculture unorganised sectors. International agencies do not collect independent growth data so their endorsement of the government data does not add value.

This low growth rate of the economy underlies the current economic problems – stagnant private investment, fiscal deficit at 95 percent of the annual target in the first five months of the year, tardy exports growth and inadequate employment generation. Of course, other factors (GST, external climate, rise in petroleum prices) are also responsible for these problems but demonetization is a major contributor.

Changing ‘Benefits’

No government admits mistakes. The spin doctors shift the goal posts. So we have heard of cashless to less cash economy and to formalisation of the informal economy. Since all the money had come back into the banks, the line changed to how that would help track the black income generators. Next, data was put out as to how the number of filers of tax returns had increased and that tax collection had risen.

To achieve a less cash economy other means can be used than the hugely damaging demonetisation. A lot of advance preparation is required for its success, namely, financial literary, electricity, internet, regulation and security. Further, little black incomes are generated in the informal sectors so how would their formalisation help? Yes, more tax is collected than earlier but the direct tax to GDP ratio has hardly increased.

The biggest misperception about the black economy is that ‘black means cash’. So, it was thought that if cash is squeezed out of the system, black would go. But cash is also used for circulating the white economy. Further, it does not stop the process of black income generation and can at best impact less than 1 percent of the black wealth held as cash. But since 99.3 percent of the demonetised notes have been returned, it did not even impact this 1 percent of the black wealth.

In brief, the drastic note shortage was short term and it is over but its long-term consequences persist.

Shift again, demonetisation is endorsed by the people — the party in power has won major state elections. This only means that the economic and political perceptions can diverge. The public accepted that `black means cash’ and demonetisation would eliminate the black economy. Two years down the road, the ruling party senses growing disillusionment and is shifting the goal post further to defocus public attention from demonetisation.

Arun Kumar is Malcolm Adisesiah Chair Professor, Institute of Social Sciences. The article is based on the author’s book, `Demonetization and the Black Economy’. 2017. Penguin (India).

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Tussle between RBI and govt should have been handled behind closed doors, says UBS

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Tanvee Gupta Jain, chief India economist at UBS, spoke to CNBC-TV18 about the domestic liquidity concerns, IL&FS issue and the current friction between the government and the RBI.

“The tussle between the two should have been handled behind closed doors. One would be closely watching the announcements on November 19.”

Talking about the NBFC issue, Jain said, “The concerns that investors feel about NBFCs is not a systematic risk and is a temporary concern that should ease out in next two quarters.”

“We do expect this NBFC stress in terms of liquidity concern to be derailing or kind of disrupting discretionary consumption growth but we think it is one-off problem and should ease out over next couple of quarters and would not derail India’s macro story over the next year,” Jain said on the sidelines of UBS India Conference.

“However, the liquidity concerns could have an impact on GDP growth because lot of the NBFC credit – borrowing in short-term market and lending in long-term was supporting overall credit growth in the economy,” she added.

“If we do not hear more default concerns and if we assume IL&FS as one-off concern and not spread out and the regulator the RBI keeps a strict control on NBFCs going forward in terms of their asset liability mismatch then the risk could be contained at this point,” she said.

The GDP growth in second half is estimated to slow down to 6.7-7 percent year on year for the December and March quarter. For the full year, the house has a GDP growth expectations of 7.3 percent, which is 20 basis points below consensus.

“The lower growth expectations are on back of liquidity concerns, higher crude prices, weaker rupee,” said Jain, adding that they expect the second quarter GDP growth to be in 7.4-7.7 percent.

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Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Despite many challenges, growth to be near-trend in 2019: Moody’s

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Despite the many global and domestic headwinds, the country’s GDP growth will be “near trend” in 2019, global rating agency Moody’s Investors Service
said Tuesday.

The agency said emerging markets, including India and Indonesia, are likely to grow near-trend in 2019, even as global growth is expected to decelerate. The ongoing trade and currency wars between the world’s largest economies have blamed for the deceleration in the global growth engine.

It can be noted that the country is facing many challenges, including currency depreciation and a widening current account gap and the resultant balance of payment troubles, which is said to be one of the prime causes of the
rupee plunge, which since the beginning of the year lost more than 14 percent.

The GDP growth accelerated to 8.2 percent in the June quarter of the current fiscal year, after clocking a 6.7 percent expansion in fiscal 2018.

The agency pointed out that India is among the list of countries facing the most severe currency depreciation with the rupee nearly losing 15 percent till date.

Moody’s is the only one among the three major global rating agencies to have upgraded India in recent years. It has a ‘Baa2’ rating with a stable outlook at present, while the other two have a BBB- rating with a stable outlook on the
Indian sovereign.

It can be noted that the rupee touched life time low against the dollar and touched $74.49 against the greenback last month. However, it has recovered some lost ground in the last fortnight, with the decrease in oil prices.

Crude oil prices are one of the key influencers of a host of factors, including the current account deficit and also domestic inflation as fuel prices get reviewed daily as per the movement in the Indian crude basket.

The inflation-targeting monetary policy committee of the Reserve Bank will continue to tighten rates in 2019, the agency said.

It can be noted that the RBI has hiked rates twice in June and August review this year by 0.50 percent before surprising with a status quo at the last announcement.

Other markets, including Indonesia, Brazil, Turkey and Argentina, will also see monetary tightening, it said.

In a brief mention of the next year’s general elections, the agency said the exercise is a “political risk”.

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

India set to topple Japan as world’s 3rd largest economy by 2030: HSBC

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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India will overtake countries like Japan, Germany, the UK and France to become the world’s third largest economy by 2030 on account of the economy’s rapid growth and a rising working-age population that’s the envy of an aging developed world, according to HSBC estimates.

The South Asian giant was seen as “among the most striking” gainers in the bank’s long-term rankings while China will topple the US to become the world’s largest economy by 2030.

“The model correctly projected that the likes of China, India, Indonesia and the Philippines would outperform their emerging market peers and that developed market growth would remain much more subdued,” economists Janet Henry and James Pomeroy said in the report dated September 25.

According to the report titled ‘The World in 2030’, young populations with higher growth in working-age population growth will have a greater share of the population that is of working-age over the next decade or so, helping to lift per capita growth rates, not just total growth rates.

“As these young people age (up to about aged 55 according to UN studies), they should become more productive, particularly as education rates continue to rise across the emerging world,” said the report.

HSBC estimates showed that over the coming decade or so, roughly 70 percent of global growth will be from countries we currently describe as emerging.

“As these countries develop and the nature of growth becomes more domestically oriented and consumer-led, such as we are seeing in China, the influence on developed markets will rise,” the report said.

The advance of China and India is the big story, but there are a number of other messages. One is that the US will continue to pull ahead of the rest of the developed world. Another is that India’s neighbours, Pakistan and Bangladesh, will also shoot up the rankings.

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Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

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GDP growth hits 2-year high: Here is what experts have to say

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Growth engines are firing once again and the economy is off to a flying start in the new financial year.

Gross Domestic Product (GDP) growth rate has hit the magic number of 8.2 percent in the April-June quarter. This is the highest in the last two years. There was some impact of the low base because growth in the first quarter last year was at a modest 5.7 percent thanks to demonetisation and GST rollout. Nonetheless, 8.2 percent is much better than what the street was expecting.

The economy also fired on all cylinders – agriculture growth was at 5.3 percent, manufacturing was at a robust 13.5 percent, and construction growth was at 8.7 percent.

Capital formation is at a healthy 10 percent so, is this growth rate sustainable or is this too fast for our good.

Pronab Sen, former chief statistician, Sajjid Chinoy, senior economist at JP Morgan and Soumya Kanti Ghosh, chief economic advisor of SBI, discuss GDP data with CNBC-TV18’s Latha Venkatesh.

Pronab Sen, is this a great number, 8.2 percent or is it that 5.7 percent takes away part of the glory, part of the sheen and it is really just about 7-7.5 percent?

Sen: If you correct for the base that is about right but the thing is 8.2 percent is a good number but there are good parts and bad parts. You already mentioned some of the good ones like agricultural growth, manufacturing, what you did not mention is construction.

However, there are some worrying signs as well. The first and the most important worrying sign is that services has come down way below what it has been maintaining over the last several years. I have no idea as to why that has happened. It is something we need to analyse because services have been a major driver.

The other one which I don’t think people have noticed is that public services, which is essentially government services, that has come down dramatically. It is about 11 percent off now and the likelihood is that going forward it is going to come down to somewhere around 6-7 percent.

So, while we should all be very pleased with these numbers especially because of agriculture and construction, we should be a little concerned that we don’t go into a state of euphoria. My own sense is next quarter we will be looking at something closer to 7.5 percent.

Sajjid Chinoy, your first thoughts from the numbers, the good, the bad if any?

Chinoy: I think we should accept that the glass is two thirds full but one-third is empty. Eight percent is in large part because you had a very weak base in the same quarter last year but we had all built that into our forecast of 7.5 or 7.6 percent.

The fact that it has surpassed market expectations suggests that growth is really strong.

Just want to clarify what Pronab Sen said, I think it is easy to read the numbers and say the industry is growing at 10 percent, services at 7 percent, this is all manufacturing and industrial led, my reading is exactly the opposite.

If you go back four quarters ago the 10 percent industrial growth was on a base of 0.1 percent. In fact, in our view, the upside surprise happened on the services side because it was contending with a base of 9.5 percent growth in the same quarter last year.

On that base of 9.5 percent to grow above 7 percent I think was very impressive. So, I draw the opposite conclusion that the high-frequency data had been telling us for a while that services has been surprising to the upside, the PMIs have been very strong in services, manufacturing has actually been a bit disappointing.

So, my interpretation is the opposite that the buoyancy that we are seeing on the ground is services which correlates much more with domestic demand. Industry sounds good in this report because it is a weak base but it is not firing as strong as these numbers suggested and in a way it is understandable because it is geared more to the exports cycle and exports have been a tad bit disappointing.

So, a good strong number helped by a good base in my view reflecting strong domestic demand but like Pronab Sen said, as the year goes on and as the base normalises, we should expect that year on year growth rates will begin to ascent down but even if they are above 7 percent, that will be a very good showing in a challenging global environment.

You said you would take away 0.5 percent for the base but I was trying to look at it as a two-year average. If you looked at FY17 number and you looked at the FY19 number then it is a 14.26 percent growth, so that would work out to 7.1 percent. That looks just about par for the course. Therefore is it very celebratory?

Ghosh: I tend to agree with you and I also tend to partly agree with Sajjid and what Pronab Sen said. I believe that on the overall headline basis if we calculate, as Sajjid was saying manufacturing is coming over a negative base and in manufacturing, this was expected because we had a very strong corporate GVA growth in Q1. So, that was expected.

However, my sense is that on the GVA numbers there could be actually 40-50 basis points impact but the impact on the GDP could be actually higher than what we have estimated and there your 7.1 or 7.2 percent conjecture comes.

So, GDP obviously has been helped by a stronger base much more than even the GVA base because we also had the indirect taxes and subsidies part which is contributing to that, that is the first point.

The second point, where I like to differ with Pronab Sen is on agricultural growth rate. The growth of 5.3 percent is a very good but if you pull out it  and the allied activities growth rate, you will actually find a startling revelation that for the last three to four quarters the contribution, and this time if you strip out the allied sector activities, the agricultural growth rate actually comes to around 2.5 percent.

So, food grain is still stuck at 2-2.5 percent growth rate and that for me is a challenging thing.

The other factor in the agricultural sector which I just want to highlight is the deflator. If I calculate all the deflators, the agricultural deflator continues to remain at very low levels.

The way the prices are behaving, I am not sure whether this deflator will actually inch up from there and that to me is a matter of concern because the sector continues to be plagued by depressed prices and this could be a headwind going forward in my view.

Political headwind or aggregate demand headwind?

Ghosh: It could be a both, it could be a political or aggregate demand headwind because if we actually look to the aggregate bank portfolio, in the first quarter you will find that the agricultural NPA as a percentage of advances has risen for most of the banks.

So, that is a worrying sign, when we are actually having a correction in the asset quality cycle so that is moving the opposite way.

Should be worry about the fact that agricultural deflator is very low? In a way it is good if agriculture output is not much more than 2.5 percent because we are reaching some kind of self-sufficiency in food isn’t it?

Sen: That is what is being talked about is crop agriculture. As far as foodgrains are concerned it has always hung around 2-2.5 percent, I mean this is nothing, and practically all the growth in crop agriculture has come essentially from vegetables.

Leaving that aside, I think the point that Soumya Kanti Ghosh made is an important one. So, it is not just the 1.6 in agriculture. If you take the total GDP deflator and you go for the agricultural price increase what you are getting is enormous increase in non-agricultural prices, unacceptably high levels.

So, what he was talking about is not that farmers are making roughly zero addition of income they are actually getting negative real income. When you are talking about headwinds this is a big headwinds.

Would we be right in saying that now we are probably pushing upward in terms of potential growth? Potential growth had steeply fallen after that big growth from 2003 to 2010. Now do you think we have troughed out and maybe these are long-term trends that our potential growth is set to increase?

Chinoy: Itis a bit premature to say and for the simple reason that if potential growth had increased meaningfully in the last year or two then the growth we have seen in the last few quarters which have been upwards of 7 percent would not have been accompanied by higher core inflation.

So, if you are running at potential and you are not running above potential then core inflation would not have picked up from 3.5 percent in the middle of the last year to 5.50 percent earlier this year. And 5 percent because that is the proof of the pudding that if your potential has picked up you should be able to run at 7.5-8 percent growth and not stoke core inflation.

That is also consistent with the fact that as we have discussed in the past, investment to GDP in the last few years has trended down and that is not consistent with arguing that potential growth is picking up.

Now India is not alone in this. If you just take a larger view you step back after the global financial crisis and you see both for developed markets and for emerging markets potential growth has come down for different reasons. For the developed market it is because populations are ageing and productivity growth has fallen very sharply and for a variety of other emerging markets it is the same rationale.

So, this is not to say India’s potential will not go up in the future. It will, but for that to happen I think we need to see investment to GDP go up and capital deepening to happen which will stoke total factor productivity growth. The higher potential in the mid 2000’s was a direct consequence of much higher productivity growth.

Would you agree too early to talk about potential growth improving?

Sen: Yes, I don’t think potential growth is any more than 7.2 percent at this point. Which was roughly what it was in 2004.

Would you say the time has come to cool down aggregate demand a little more, a third back to back rate hike is warranted?

Ghosh: In terms of the growth rate I will say that. If you look into the RBI statements and its intervention patterns in the foreign exchange market in the last couple of days, I think there is a possibility in the central bank circles that more amount of forex intervention actually leads to increased cost and over a point of time that may not be beneficial for the economy because it leads to higher term structure of interest rates.

If that is the possible thinking and given the fact that RBI possibly has not been intervening aggressively in the rupee market in the last couple of days, the rupee is now close to 71, possibly it could breach that, possibly it could rebound.

I think not because of cooling down aggregate demand but because we had two successive rate hikes and that will play out over a point of time and also the fact that the inflation number this month could go well below 4 percent because food prices continue to remain significantly depressed.

My sense is that if the central bank is not in favour of too much of depletion of foreign exchange reserves, it could look at other options to defend the currency if it continues to depreciate and against that background one of the possible options – text book prescription is a rate hike.

So, that we need to see whether that is the thinking or it wants to see some of the numbers play out before trying to stem the fall in the value of the rupee if it continues to do so.

Your thoughts Sajjid, isn’t it time to cool aggregate demand a little more – a October rate hike?

Chinoy: The October meeting will be a dilemma. I think the MPC moved in June and August precisely because it thought those back to back rate hikes would buy it some time. We all anticipated that inflation because of base effects would optically come down, the inflation number in fact was a surprise to the downside and in September you could get a sub 4 percent number but that is all water under the bridge.

We are seeing emerging markets with current account deficits come under sustained pressure over the last couple of weeks, if that pressure continues on emerging markets and on India for the rest of the month, it will be very hard for the RBI not to do something in October not matter what the inflation point says because we can’t be losing reserves at this pace.

There is no reason to panic, we have enough but what we are realising in this world is orthodox signalling from emerging central banks matters a lot.

Indonesia had to front load and that has helped calm some of those markets, Turkey and South Africa have not and they have paid a heavy price. So, RBI will have to look forward and say, we have had a depreciation which was healthy, that is going to have some inflationary consequences going forward, oil is now upwards of $75 and if the rupee is under sustained pressure, I won’t rule out a rate hike in October.

I think it will come down squarely to the rupee. If the rupee settles down and this is just a two week story, I think the October meeting will be a pause. If all of September we have this kind of stress, I think the central bank will have little choice but to move in October, you can’t wait three months for the next rate hike in the kind of turbulent global environment we are seeing.

We have been arguing for a while that some degree of currency depreciation is good, it is healthy and we have already begun to see that in today’s numbers.

We have had a 6 percent real depreciation in the first six months of the year and already in the second quarter the drag from net trade in today’s GDP number is meaningfully less, it is lowest in the last five quarters.

So, these things do pan out eventually. The more the exchange rate works, the less we have to curb aggregate demand to contain the current account deficit.

Pronab Sen, time to cool aggregate demand, another rate hike?

Sen: There is another factor which we haven’t taken into account and this is going to come into play in the last two quarters, is the election effect. Traditionally every time elections have happened the demand side has boosted by anywhere around 0.4-0.5 percent of GDP.

I see no reason to believe why it is going to be different this time around. It isn’t going to be different. So, if the RBI does factor it into account, they are potentially looking at a massive increase on the aggregate demand front and they may have to take measures at that point which would make for very interesting economics in the country.

So, what you are saying is for the rest of the fiscal not just one more but possibly two more hikes?

Sen: That depends. The election impact usually starts 4-5 months before, so it could begin in the third quarter or it may begin at the end of the third quarter and mostly in the fourth quarter. So, that is something that people will have to keep their eye open for.

What is the chance of a far more pronounced improvement in growth because we often tend to – there have been times when people underestimate the bounce up. You have a rupee depreciation effect which could increase growth, as you said an aggregate demand effect could increase growth, the NPA cycle is definitely ending, that could have its own buoyancy impact, do you think we are actually going to be surprised and although there is a big base effect for the third and the fourth quarter, is there a good chance that we are going to end the year as well with a 7.8 percent kind of growth?

Sen: The big problem in all of this is agricultural distress. You are talking about a very large percentage of the population whose real incomes are going down.

So, you have these other effects playing out but agricultural prices just continue to get weaker month on month and that is a worry. So, that is going to be major dampening factor. If construction keeps up, we are keeping our fingers crossed, yes we could have an upside.

How much would you revise up the growth forecast for the full year?

Chinoy: We are going to revise it up closer to 7.3 percent. There are some tailwinds you mentioned but also some headwinds. Oil at $77 this year is a negative in terms of trade shock and monetary conditions are beginning to tighten or have tightened in the last few months and may tighten more if the currency is under some pressure and the RBI has to move.

Deleveraging is progressing and that is going to have some dividends down the road but we are not seeing credit growth accelerate sharply. So, I think if we can end the year with 7.3 percent which is our current forecast, I think India will be doing very well in a turbulent global environment.

Your final number for the full year has it changed from what it was before you saw this Q1 GDP number?

Ghosh: No. We have GDP GVA at 7.3 percent and GDP at 7.4 percent. One small observation I would like to make, today the credit growth number has also come and if we look into the data, credit growth is up only in the personal loans and the housing segment and it is down in all other segments.

So, that indicates that the demand growth which we are talking about is still not yet achieved within the economy. So, that will be one factor at the back of all the policy decisions going forward also.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow