Click here to listen to the full interview with Rajeev Malik

Mumbai: India’s gross domestic product, or GDP, grew 7.9% for the quarter ended September, the fastest pace in 15 months boosting sentiment in the stock markets and prompting economists to revise growth estimates upwards. However, this road forward is bumpy and volatile, warns Rajeev Malik, economist at Macquarie Bank in an interview with Mint. Edited excerpts:

Do you think this kind of accelerated GDP growth is sustainable?

Well, that level of growth is not sustainable at least over the next one or two quarters. There were one-off factors which resulted in such an elevated pace of growth. While we do think that India is headed for an 8% GDP growth in the next year, the December quarter will get hit and we will see a bounce back in the March quarter. So it’s going to be bit of a volatile ride.

Do you think agricultural growth could be further revised downwards?

Bumpy road: A file photo of a Tata Steel blast furnace in Jamshedpur. Macquarie’s Malik says industrial activity will continue to drive gross domestic product growth in the next two quarters. Santosh Verma/Bloomberg

Industry and services would do well, but within services, part of the benefits from the pay commission hike we saw will not be repeated. I would not play up on the expenditure side—what we have seen on private consumption and investment, because much of the improvement is still supported by policy. And that was exactly what policy was meant to do—to boost domestic demand.

So we need, more self sustaining elevated growth, and that is still some ways off, which is precisely why the removal of stimulus is going to be done in a gradual (way).

Bank credit is not growing fast. What do you think is driving industrial activity?

Bulk of the improvement is coming from sectors where the fiscal stimulus has worked. If you look at automobile or two-wheeler sales for example, or infrastructure-related industries, all these have been the key beneficiaries. Don’t forget, even if bank credit (growth) has been decelerating, companies have been able to raise non-bank financing. And finally, the latest loan growth numbers—they inched upwards, but it remains to be seen if it’s a turning point.

Will industrial activity lead to an attendant pick-up in services sector?

It certainly will. Don’t forget that some of the services on their own are doing well—tourism is a case in point. Trade-related and retail-related activity will be picking up and when loan growth begins to pick-up, finance will be doing better. The outsourcing industry, will incrementally, be doing better. We are still in a transition phase, where partly because of good policy support, things are improving, but at the same time some meaningful improvement is taking place in other sectors.

Are you worried that government expenditure accounted for a large part of growth, while private or retail demand is not increasing as fast?

The whole idea for an expansionary fiscal policy is for the public sector to offset the softening spending by the private sector. That is precisely why (India took on) the fiscal gamble and, to be fair, it has paid off.

So the critical issue is more of private growth has to come through, but it is still early stages which leads me to a related issue—I don’t think RBI (Reserve Bank of India) is going to be aggressive in terms of its tightening policy.