India's economy grows at fastest pace in a year, slowdown expected

·3-min read
FILE PHOTO: Spread of the coronavirus disease (COVID-19) in Delhi

By Manoj Kumar and Aftab Ahmed

NEW DELHI (Reuters) - India's economy grew 13.5% in the April-to-June quarter, its fastest pace in a year, though economists said growth is likely to lose momentum in coming quarters as higher interest rates cool economic activity.

The Reserve Bank of India (RBI) has raised its benchmark repo rate by 140 basis points since May, including 50 basis points this month, while warning about the impact of a global slowdown on domestic growth prospects.

The June quarter's annual growth, driven by manufacturing and services, such as accommodation and travel and rebounding from pandemic curbs, came in below a 15.2% forecast by economists in a Reuters poll, but well above 4.1% growth in the previous quarter.

The last time India's economy grew faster was in April-June 2021 when it gained 20.1% from the pandemic-depressed level a year earlier.

"Growth in the June quarter is good enough to achieve over 7% annual growth for the whole fiscal year," T.V. Somanathan, the finance ministry's top official, said after the release of data, noting GDP had exceeded pre-pandemic levels by nearly 4%.

He said recent rate hikes by the central bank were unlikely to impact private investments.

Investment growth rose to 20.1% year on year compared with a 15.9% increase in the previous quarter, with state spending slowing to 1.3% growth after a 13.2% rise in January-March.

Manufacturing grew to 6.5% growth after a 0.2% contraction in the previous quarter while the construction sector grew 16.8% after 2.0% growth in the previous quarter, data showed.

(Graphic: India's growth story, https://graphics.reuters.com/INDIA-ECONOMY/GDP/akpezbgaxvr/chart.png)

Consumer expenditure, which accounts for nearly 55% of India's economic activity, remained strong despite soaring food and fuel prices.

Growth in consumer spending rose nearly 26% year-on-year in the April-June quarter from 12.3% in the January-March quarter, Wednesday's data showed.

WEAKENING GROWTH MOMENTUM

Economists said Asia's third-largest economy faced downward risks with tighter monetary conditions and higher energy and commodity prices expected to weigh on consumer demand and companies' investment plans.

Kunal Kundu, an economist at Societe Generale in Bengaluru, said India's economic recovery process would be impacted by a weak labour market recovery and slowing domestic consumption.

"For FY23, we expect the real GDP to grow by 7.1% y/y, though a lower print (rate) would not surprise us."

The latest Reuters poll showed economists anticipated growth this quarter could slow sharply to an annual 6.2% before decelerating further to 4.5% in October-December.

The rupee's depreciation of more than 7% against the dollar this year has pushed up the cost of imported items for consumers and businesses.

India's nearly $3 trillion economy, with a per capita income of around $2,100, has grown less than 2% a year in real terms on average over the past three years after contracting 6.6% in 2019/20, which largely coincided with the coronavirus pandemic.

Infrastructure output, comprising eight sectors including coal and electricity and accounting for nearly 40% of industrial output, grew 4.5% year-on-year in July compared to 13.2% in the previous month, separate data released on Wednesday showed.

Policymakers are worried that the growth was not creating enough jobs to keep up with the large numbers of young people entering the workforce.

Fear of global recession remains an evolving risk for export-focused sectors such as IT, automotive, and industrials.

Suvodeep Rakshit, an economist at Kotak Institutional Equities, said that while services have seen some rebound, downside risks were seen increasing from the second half of the current financial year due to external factors.

"We remain cautious on domestic growth too, though India is likely to perform relatively better than other economies."

(Additional reporting by Chris Thomas, Rama Venkat and Nishit Navin in Bengaluru; editing by Tomasz Janowski, Mark Heinrich and Jonathan Oatis)