See pickup in activity; GDP up 5% as per old series: Pros

Below is the verbatim transcript of Indranil Sengupta and Pranjul Bhandari's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Latha: How would you characterise this number? Was it weaker than you thought and does it mean that you will have to revise your year-end figures as well?

Bhandari: It was a bit of a mixed bag. The gross domestic product (GDP) number per se was lower than we had expected at seven percent. We were expecting almost eight percent growth, but the gross value added (GVA) number was higher than we had thought. It came in at 7.1 percent and a full percentage point higher than last quarter’s reading.

Out of the two, while the global norm is to look at the GDP number, here we would actually prioritise the GVA number because the way the GDP data is panning out. Recently, GVA is a cleaner read of the underlying activity in the economy. And, in GVA, we did see that one percentage point increase in the reading.

Now, on the side, we also do a lot of analysis using about 20-25 coincident indicators, other indicators of activity and they too are suggesting that there is some improvement. So, for instance, our indicators show that about 50 percent of GDP are showing an increase, are showing an improvement and about 50 percent is not yet showing any improvement. We had done this same analysis a quarter ago and we had found that only 40 percent was showing improvement, 60 percent was not. So, over a quarter, even our indicators analysis suggests that there is some pickup in activity which yesterday was also borne out by the GVA data that we have seen.

So, activity is lifting, but of course, there is some confusion in the GVA-GDP distinction.

Sonia: So, can you just throw some more light on that pickup in activity? I mean was it within industry, within services, private sector gaining? Any more colour that you can throw on it?

Bhandari: So, our analysis shows that it has basically come from the government. Now, it is not very clear when you look at the headline, but if you really pass through the details, you see that government expenditure shows up in different parts of the GDP. So, on the supply side, there was a big increase in construction growth – construction growth almost grew 6.9 percent and it has been very weak in the last couple of quarters.

Now, a lot of the government capital expenditure (capex) increase that we have been seeing the first quarter actually shows up in the construction sector. Then on the product side, we also saw public administration spend which is generally the government spending on the social sector, education, health. That too saw some small increases. On the expenditure side, there was a big increase in government consumption which is largely the government’s wage and salary bills and other current expenditure of the government. And there was also some lift in investments.

Now here again, we think that the small lift in investments was more driven by the government capex spend that we have seen in one quarter rather than private sector capex which does not seem to be coming in a hurry at this point of time. So, really the one common theme across yesterday’s data was the involvement of government which brings me to my second point that yesterday, we also got to know that the government has already reached 70 percent of its fiscal deficit target in the first four months of the year.

So, this upfront spending by the government might actually lose out steam later on into the year. And that is when we will need new and different drivers of growth. And finally, when we talk about different drivers of growth, oil plays a very important part.

Latha: Really, I got a slightly contrary reading. I thought public expenditure spend at 2.8 percent over an already weak base of 2.7 percent looked low to me, but you buy Pranjul’s argument that probably government spending is to be read in the Capex growth at 4.4 percent that actually government is priming?

Sengupta: The best thing that we can do at this point is try to look at the old GDP series rather than get into all these details about the new GDP series. And what we find is that the old GDP series gives you a growth of around five percent. It has been pretty much that way for the last one to one and half year. So, the economy is, if you see the GDP numbers that we have been comfortable with, the economy is growing at around five percent. So, that is point one.

Point two, coming to the Capex, we need to wait a bit more, because right now, you are comparing a period of full-fledged government with a period of an interim budget. So, naturally last year, when you had an change, election, and then you had an interim budget, the government kind of spent on the revenue part which it had to and it did not really spend on the Capex side. So, that is something that we need to see because at the end of the day, Capex is actually down. It is down from 30.4 percent to 29.8 percent. So, one needs to wait and watch what happens for the next three months when get like-to-like data on two full-fledged governments.

Sonia: But, can you not compare between this quarter and last quarter? I mean that is the comparison is making that there has been some lift in investment due to government Capex spend between last quarter and now.

Sengupta: March quarter, the government has traditionally clamped down on expenditure to meet fiscal deficit targets. This has been the phenomena for the last two to three years, so it is difficult to compare between June and March. So, I would rather compare between two like quarters. So, even the way things are going and as Pranjul said, if the government is overshooting its budget target, it will again have to go and clamp down next March. So, March quarters are somewhat special.

Latha: Are you able to corroborate or agree with what Pranjul is saying in terms of things getting better quarter-on-quarter (Q-o-Q)? I mean, either with the GDP data or through anecdotal evidence, are you able to even come to that conclusion?

Sengupta: I think there is a very slow recovery. You have got to see the thing in global context, in the sense that here we are, even in the old GDP series, growing at five percent, Brazil and Russia are de-growing. So, this is the best that you can do in the current global environment that we are in.

So, the number is disappointing when you look at India’s past growth profile or maybe when you look at expectations. But, when you see what is happening across emerging markets (EM) in particular, this is actually a very good number.

Latha: We also have the advantage of lower commodity prices and now a bit of transmission of rate cuts as well with HDFC Bank announcing yesterday. So, will subsequent therefore look better? After all, private final consumption expenditure has grown by over seven percent.

Sengupta: Yes. I think consumption recovery is in the cards, because number one, we are seeing some lending rate cuts. Number two, the pay commission will kick in with at least 0.3-0.5 percent of GDP of stimulus by April. Number three, households have saved about 0.4 percent of GDP because of lower oil prices and that is hitting a critical mass. So, at some stage they will start to spend. And, number four, at some stage maybe, the government will raise wheat prices before the elections in UP and Punjab to implement the Swaminathan formula; that is up in the air. But, the other three factors are paying out. So, we think that you are actually looking at a consumption recovery in the next 6-12 months.

Sonia: But, we have not seen any recovery in consumption just yet, so given that point, since the consumption has been very fragile and the investment revival has not been there so far, is the case for monetary easing stronger and do you expect that before the Fed policy something could take place or do you think that the RBI governor will wait till the Fed policy gets out of the way?

Bhandari: Just quickly one thing before I answer that. Oil prices had actually increased in the second quarter in the April-June quarter, they had increased 16 percent Q-o-Q. Since then, they have fallen pretty sharply. So, the impact, the beneficial impact of oil on consumption and perhaps more on corporate earnings will probably show up more later in the year and in some sense counter-act the slowdown we will see when the government stops spending. So, that is one thing on the changing drivers of growth going forward.

Now, in terms of rate cuts, recovery, as Indranil was also saying, you can see some glimpses of it here and there. But, it is very faint at this point and it is moving along quite slowly. And we do feel that at least we will see one rate cut of about 25 basis points for the rest of this calendar year. We have it pencilled in for September. I do not really see any case of it happening before September as of now, but closer to September 29, we will see how the rupee is behaving, whether it is stable or not and take a call if it is going to be exactly in September or will it be pushed towards the December quarter.