India’s economy shined in its latest report card on strong services growth and a modest pick up in manufacturing despite still-high interest rates.
(Bloomberg) — India’s economy shined in its latest report card on strong services growth and a modest pick up in manufacturing despite still-high interest rates.
Gross domestic product rose 7.8% in the three months to June from a year ago, according to government data released Thursday. It matched the median estimate in a Bloomberg survey and marks the fastest pace in a year.
“The data shows today that domestic factors, especially services, remain in the driver’s seat as far as economic activity is concerned for India,” said Rahul Bajoria, an economist with Barclays Plc.
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.
The impact of a cumulative 250 basis point rate hike since May 2022 and weak overseas demand for Indian goods may get partly offset by rising domestic consumption. However, the odds of another rate hike is building as retail inflation jumped to a 15-month high of 7.44% in July.
Inflation could remain high and affect growth as lower June to Sept. monsoon rains and dry El Nino weather conditions affect crop production and boost food prices in the world’s most populous nation.
“We expect GDP growth to moderate over the next few quarters, on the back of what is likely to be a below normal monsoon, narrowing differentials with year-ago commodity prices, and possible slowdown in momentum of government capex,” said Aditi Nayar, chief economist with ICRA Ltd.
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.
However, slowing exports weighed on manufacturing growth despite easing supply chain bottlenecks and global commodity prices. Merchandise shipments have contracted for eight straight months as orders from major buyers have fallen.
“Economic activity recovery is not yet broad-based,” said Madhavi Arora, lead economist at Emkay Global Financial Services. “Falling income growth in urban sector, shrinking corporate profitability, demand-curbing monetary policies and diminishing global growth prospects may weigh on output.”
–With assistance from Harshita Swaminathan.
(Updates with analyst quotes and breakdown on GDP figures.)
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