First-quarter growth comes in above expectations

India’s economy grew by 7.8% in the first quarter of the fiscal year ended in June. The official data came in above market expectations of 7.1%, signaling that domestic demand and the services sector remain resilient.

The growth rate matched the 7.8% expansion recorded in the previous quarter. Data released on Monday showed only limited growth in agriculture and related areas, while manufacturing and services posted a clear rebound.

Which sectors drove growth?

India’s Ministry of Statistics and Programme Implementation said several service industries stood out in the first quarter. The main contributors to growth were:

  • Financial services
  • Real estate activities
  • Information technology
  • Professional services

The figures showed that, despite weakness in agriculture, the economy maintained momentum thanks to a broader base of services and industrial activity. Strength in manufacturing also indicated that growth was not driven by services alone.

What do high-frequency indicators show?

According to Aastha Gudwani, chief economist for India at Barclays, the war involving Iran did not create as much pressure on growth as had initially been feared. Of the 20 high-frequency indicators the bank tracks, only seven pointed to a slowdown in the April-June average compared with the previous quarter, while consumer demand, auto sales and credit growth remained strong.

Risks: inflation, energy and the monsoon

The Reserve Bank of India (RBI) said in an assessment earlier this month that the economy remained resilient to geopolitical uncertainty, but growth was expected to slow over the full fiscal year. The bank forecasts 7.0% growth for the three months ended in June and 6.7% growth for the fiscal year ending in March.

According to the RBI, a volatile global outlook, elevated energy prices and supply chain pressures continue to pose risks to domestic economic activity. In addition, if El Niño conditions weaken or disrupt the southwest monsoon, they could create downside risks for agriculture and rural demand.

Pressure from energy costs has also fed through to prices. Inflation in the country rose for the ninth straight month in July to 4.45%; even so, the RBI did not raise interest rates at its August meeting, unlike some other central banks in Asia.