(Bloomberg) -- India’s economy grew at a much faster pace than analysts predicted, as manufacturing surged and the government boosted spending before elections.
Gross domestic product rose 7.6% in the three months to September from a year ago, according to government data released Thursday, higher than any of the estimates in a Bloomberg survey of economists. The figure was also significantly above the Reserve Bank of India’s projection of 6.5%.
The strong expansion means India holds onto its ranking as the fastest growing major economy in the world as manufacturers boost production, consumption picks up pace and Prime Minister Narendra Modi’s government ramps up investment before polls next year. Growth has been resilient in the face of surging inflation and the RBI’s six interest rate hikes since last year.
“The buoyant growth is being underpinned by cyclical factors like robust corporate profits, a strong fiscal impulse, with government spending being front-loaded in a pre-election year,” said Madhavi Arora, economist with Emkay Financial Services.
Modi’s administration is spending billions of dollars to boost the nation’s infrastructure and is providing subsidies for firms looking to set up production in India. That, along with healthy consumption, is leading to gains in private sector investments. Gross fixed capital formation, a proxy for investment, increased 11.04% from 7.95% in the previous quarter.
What Bloomberg Economics Says
India’s better-than-expected third quarter GDP growth supports our call for the central bank to hold-off against rate cuts in the near term. Notwithstanding a slowdown in the agricultural sector, stronger industrial activity powered a positive growth surprise. This reflects structural forces that are helping the country accelerate its integration into global supply chains.
Abhishek Gupta, Bloomberg Economics
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India’s dominant services sector, which makes up more than half of the nation’s GDP, expanded at a slower pace than the previous quarter, as global demand for financial services moderated. Growth in agriculture sector also slowed due to below-normal rains resulting in a weaker summer crop harvest. India recorded the weakest monsoon rains in five years, forcing the government to extend curbs on exports of farm commodities such as sugar, rice and wheat.
“The sharp upside surprise to the GDP figures is a welcome sign especially as it comes in the backdrop of a broad-based pickup across most non-agricultural sectors,” said Upasna Bhardwaj, economist with Kotak Mahindra Bank Ltd. “The full year GDP numbers have got a big filip after today’s figures,” she said.
Strong demand, however, will present a challenge to the central bank that’s trying to bring down inflation to its 4% target on a durable basis. The RBI kept interest rates unchanged for four policy meetings now and will hold its next monetary policy review on Dec. 8.
--With assistance from Shinjini Datta.
(Updates with charts, economists’ voices and other details)
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