Does mild jump in GDP suggest economy is turning?

Good monsoon, some dogged efforts at improving power supply, higher exports, a depreciated rupee and recovering world economy — all came to aid the Indian economy.

Growth data for the July-September quarter show the economy grew at 4.8 percent, better than the 4.4 percent in the first quarter but slower than the 5.2 percent a year ago. Also Read: Timely recognition, resolution of bad loans must: Experts
Agriculture grew at 4.6 percent, fastest in nine quarters. Likewise, electricity at 7.7 percent saw the fastest growth in eight quarters.
Industrial growth was sub par at 2.4 percent but a marked improvement over the 0.9 percent contraction in the first quarter.
The big category of services as a whole grew tepidly at 5.9 percent, similar to year ago levels, but within services the finance sector grew by 10 percent on the back of strong bank loan growth.
But this is not a sign of growth. The bond markets went into a coma in July due to Reserve Bank of India’s rupee protection measures and hence companies substituted commercial paper with bank loans. Yet there is evidence the worst is over.
Trade, hotels and transport, an important subset of services grew by 4 percent better than the 3.9 percent in quarter one.
From the expenditure side, exports grew by 16 percent.
Also, private consumption at 2.1 percent and capital formation at 2.6 percent though tepid were better than in the first quarter. Hence, the hope that the worst is over.
Those were the broad growth figures for the second quarter. It seems like growth has bottomed out even if very feebly, if you looked at the consumption and the capital formation figures as well when you look at the export and electricity figures but how will this recovery persist, how will it take shape from here and what could be the impediments to economic recovery?
Professor Arvind Panagariya, Professor of Economics at Columbia University says economic growth declined more than what he had anticipated. Though he feels the latest numbers are encouraging. "I think it is good news but the real recovery perhaps will wait until we have a new government in 2014," he adds.
Subir Gokarn, Director of Research at Brookings India and Former Deputy Governor of the Reserve Bank of India, is very happy with the second quarter numbers. According to him, this quarter's numbers show that the investment rate hasn't declined significantly. But despite this, the economy seems to have a lot of idle capacity, which is not idle necessarily because of demand, of course that is a factor, but it is further aggravated by the absence of complementary capacities, he adds. Below is the verbatim transcript of Arvind Panagariya & Subir Gokarn's interview on CNBC-TV18 Q: How does it look? You are looking at India from a distance; the entire world is going through severe and deep scars of the last five years or in the last five years. Does it look like the Indian recovery is sustainable or does it look feebler than most other countries? Panagariya: I have been an optimist on the Indian economy. In my judgement the economic growth declined more than what I had anticipated. So, what we have seen in the latest numbers is encouraging to me. I think it is good news but the real recovery perhaps will wait until we have a new government in 2014. Q: I am looking at the next step. Does 4.8 percent become 4.9 percent, 5 and 5.1? Is there that much confidence or is this just an export reign kind of performance and we could even slip back yet again or remain in the four handle for maybe several quarters? Panagariya: If you look at the composition of growth rates across different sectors, it looks like good news; the sectors that are driven by the private sector, those have done better in Q1 and that I see as a sign that this recovery will continue but when I was referring to 2014, I meant when we step jump into the growth rate is what I like to have… Q: Of which there is no evidence? Panagariya: Not yet. The decision making paralysis at the Center, which was the source of the rapid decline in the growth rate in India, is still there. Q: Do you think we have put at 4.4 percent first quarter the worst behind us, how are you looking at the second half of the current year and first half of next year? Gokarn: The striking thing that this quarter’s numbers suggest is that the investment rate hasn’t declined significantly. Looking at the investment to gross domestic product (GDP) ratio, which comes in at 33 percent and this has not been very different or this is not very different from the last few quarters, if I recall correctly. So, we have been around 31 percent to 32 percent, this time its 33 percent of GDP, which on a very rough calculation of ICOR - the incremental capital output ratio should be suggesting a growth rate of perhaps 6, slightly over 6.
It indicates that we are below 5 with an investment trade - remember the last time we had a run of 5 percent growth, which was between 1997 and 2002, the investment to GDP ratio is about 25 percent. We are now doing 5 percent growth with 33 percent investment. This is a bit at odds with what companies are generally saying about capex and so on but the fact is that if you take these numbers at their face value, the investment trade is still pretty decent. Q: Can you take ICOR at 4; the incremental capital output ratio has risen from 4 to probably 6 for a longish bit. Gokarn: That is the point I want to make, when you have such a mismatch from a trend ICOR, what it suggests is the emergence of very specific sectoral bottlenecks; that investment is going on but it’s not fully utilised, is not living up to its potential because there are other bottlenecks that are constraining it and the classic example that we have today is the power sector, where we have had so much increment in power capacity over the last four-five years and yet the plant load factors are low – 60 percent or so on an average, particularly newer plant because fuel linkages have not been put in place.
So, what we have is a lot of idle capacity, which is not idle necessarily because of demand, of course that is a factor but it is also further aggravated by the absence of complementary capacities.