Source- CNBC TV-18

Saumitra Chaudhuri, former member, Planning Commission says manufacturing can become an engine of growth if policies are implemented effectively.

Indian economy expanded 5.7 percent in the first quarter of FY15, the highest in nine quarters, against a growth of 4.6 percent in Q4 of 2013-14. The economy grew 4.7 percent in the year-ago period. Sharing outlook on the Indian economy, Saumitra Chaudhuri, former member, Planning Commission says that confidence is high, but domestic demand is still sluggish. He expects FY15 growth to be over 5.5 percent.

The first quarter is generally a lean period for agriculture, despite that the sector registered a growth of 3.8 percent versus 4 percent Y-o-Y. However, he doesn’t expect Q1 agriculture growth to be repeated in Q2 and Q3 .

The revival in the first quarter was led by industry. The manufacturing sector grew at 3.5 percent, against a 1.2 percent contraction year-on-year. According to Chaudhuri, the sector got a beating for variety of reasons and can become an engine of growth if policies are implemented effectively.

Meanwhile, Laveesh Bhandari, Founder Director, Indicus Analytics says while one is seeing optimism about the country’s economic growth across board, but optimism in urban areas lower than that of rural areas. When asked about the impact of strong growth on soaring inflation,  Bhandari feels even a small pick-up in growth will have impact on inflation, but Chaudhuri disagrees.

Below is the verbatim transcript of Laveesh Bhandari and Saumitra Chaudhuri's interview with CNBC-TV 18's Latha Venkatesh, Sonia Shenoy and guest editor Abhay Laijawala, MD & Head of Research, Deutsche Equities India.


Sonia: It was a 10-quarter high this time around when we got the Q1 FY15 GDP numbers at 5.7 percent and many indicated that this is a materially strong start to the year but it might not pan out in the next couple of quarters because the industrial numbers came off a very low base. What is the sense you are getting about how the rest of the year may pan out and how we might end FY15 as far as the GDP numbers are concerned?

Bhandari: These are the Q1 estimates and these are the first estimates and they are provisional. So, first I would expect these numbers to eventually be much lower than what has come out. They do tend to be adjusted a bit sometimes. Second is that definitely there is an improvement and no one can deny that and that improvement comes in from two sources. One is there is a certain cyclicality even during bad times and we are seeing some of that and other is of course an expectational part. However inherently if you look at the very DNA of the Indian economy in rural areas and small towns you are not really finding this kind of growth.

Abhay: I know that Indicus is amongst those very few consultants who actually put out GDP and you all drill down to the district level, that is the kind of data that you all work on. You mentioned that you are not seeing that recovery in small towns but what I want to understand from you is what is the feeling you are getting, while we may not have yet seen the recovery do you believe that the data points are suggesting that small town India and at the district level as well the optimism that big town India is seeing is it percolating down to that? It would also be interesting to know from you which are the regions in the country where you are seeing more optimism and regions where you are seeing relatively less optimism?

Bhandari: One has only a few data points but I would put it the other way round. I sometimes feel these days that the optimism in urban and large urban centres is actually much lower than the optimism that one finds in smaller areas including in rural areas. Optimism as we all know has many short term ups and downs but where optimism is concerned there is almost a complete uniform distribution across India. Generally "acche din aane wale hain" has actually percolated down to the masses.

Latha: What is your sense, if you looked at the index of industrial production for instance the index is 170 points and the index in April 2011 was 166 points. While there would be growth because things fell back so much in terms of the total output we are still where we were about 3-4 years ago. What is your sense of this 5.7 percent growth? Can this be the normalised rate for the full year?

Chaudhuri: The first thing one should point out is with these quarterly numbers if you look at all of the quarterly numbers in detail is that while many things haven’t changed dramatically from the previous quarters there is no deterioration in almost anything that you can look at. Everything is either where it was or there is an improvement. I think that is a significant departure from previous quarters.

If you look at the corporate data for either the topline or the EBITDA growth or the PAT growth the same story seems to be true that while there is no remarkable improvement in anything particularly but there is no deterioration in anything. So, what you are getting is net gains. Net gains are what you see in Q1. In Q1 we are sort of benefitting from higher agricultural growth of last year because Q1 of financial is the last quarter of the crop year. So, you got 3.5 percent growth in agriculture and it is unlikely to be repeated in Q2 and Q3. Probably we might see small negative numbers. So, that would certainly pull down overall growth.

While focusing on non-farm sector growth I think the improvement will continue may be it a slightly slower pace in Q2 and may pick up a bit in Q3 because whatever numbers we have for Q2 the core index for July for instance isn’t something which is heart-warming and we have no reason to believe August will be significantly better. However at the same time if you look at electricity generation that is sort of growing in double digit numbers for several months. So, I suspect there is some activity going on the ground, it may not give you very large numbers but I think an improvement in non-farm sector growth in Q2 is little bit and Q3 much more so and Q4 much more so is certainly possible.

So, on the whole I would say we are looking at perhaps growth of somewhat above 5.5 percent if not 5.7 percent because when you are at a turning point you don’t really know how quickly you will turn till you are actually there. Confidence is high, confidence in the business sector is high, confidence in consumer sector, domestic markets are low. Most people who sell in the domestic market tell me that demand is sluggish. However that is not surprising because you have had 3 or 4 years of bad growth and 3-4 years of poor employment creation and wage growth. So, whatever gains were there till before that certainly were significant but in the last three years there has been a slowdown. It will take a little while to get out of it but I think the numbers tend to either show that a) there is no deterioration on any score and b) there is improvement in some. I think that is a very positive reading.