Services Sector Fuels India Economic Growth to Fastest in a Year

India’s economy is expected to shine in its latest report card on strong services growth and a pick up in manufacturing despite elevated interest rates.

(Bloomberg) — India’s economy is expected to shine in its latest report card on strong services growth and a pick up in manufacturing despite elevated interest rates. 

Gross domestic product is estimated to have risen 7.8% in the three months to June from a year ago, according to the median estimate in a Bloomberg survey ahead of Thursday’s data. This is the fastest pace in a year and exceeds a 6.06% expansion in the three months ended March. 

Steady growth in the Asia’s third largest economy gives room for the financial authorities to fight inflation ahead of several state polls this year. The central bank kept rates unchanged for a third meeting and ordered banks to mop up excess liquidity while the government imposed export restrictions on some food staples. 

“This growth print is likely to show domestic demand continues to propel the expansion, even as exports slow and monsoons remain uneven,” said Rahul Bajoria, economist with Barclays Plc. 

The impact of a cumulative 250 basis point rate hike since May 2022 and weak overseas demand for Indian goods should be partly offset by greater capital spending by the federal and state governments, he added. State revenues have risen due to higher tax collections. 

The odds of another rate hike is building as retail inflation jumped to a 15-month high of 7.44% in July. It could stay high as lower June to Sept. monsoon rains and dry El Nino weather conditions affect crop production and food prices in the world’s most populous nation.

Economists in another Bloomberg survey are projecting 6.1% growth for the fiscal year to March 2024, below the Reserve Bank of India’s 6.5% estimate.

Services Boost

Companies in the information technology, hotels and transport industries are expanding and could bring more business to the the services sector, which contributes to more than half of GDP. Double-digit credit growth in the financial services sector is also helping.

“This pick-up in services sector activity could continue over the second quarter and would aid growth in private consumption,” said Gaurav Kapur, chief economist, IndusInd Bank Ltd. 

What Bloomberg Economics Says

“India’s GDP growth likely vaulted higher in the April-June quarter driven by a sharp increase in manufacturing, according to our estimates. A plunge in raw materials costs alongside increased public infrastructure spending, a raft of government incentives and geopolitical tailwinds likely drove industrial activity.”

— Abhishek Gupta, India Economist

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Manufacturing output also likely gathered momentum as supply chain bottlenecks eased and global commodity prices eased. However, exports have stayed soft with merchandise shipments contracting for eight straight months as orders from major buyers have fallen. 

“Weak exports will be a drag,” said Saugata Bhattacharya, Executive Vice President with Axis Bank Ltd. Despite significant external and domestic risks, growth for the fiscal year ending March 2024 will be around 6.4%, one of the highest among the large economies, he said. 

Teresa John, an economist with Nirmal Bang Institutional Equities Pvt in Mumbai, raised her growth forecast for the current fiscal year.  “A rebound in corporate profitability and strong construction activity will boost growth prospects,” she said.  

–With assistance from Anup Roy.

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