Barclays Plc and Citigroup Inc. predict the economy will now expand 6.7% in the fiscal year ending in March, up from previous forecasts of 6.3% and 6.2%, respectively. Several other analysts also bumped up their estimates.
The optimism stems from Thursday’s report showing gross domestic product rose 7.6% in the three months to September from a year ago, 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%.
India is holding onto its position as the fastest-growing major economy in the world, with growth remaining resilient in the face of a global slowdown and the Reserve Bank of India’s six interest rate hikes since last year. It’s also a boost for Prime Minister Narendra Modi, who is seeking to retain power in elections next year.
Last quarter’s growth beat came from a boost in manufacturing, construction and a ramping up of government investment ahead of elections. 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.
“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.
Businesses are also expanding operations, adding to the strong growth in investment. Growth in gross fixed capital formation, a proxy for investment, accelerated to 11.04% last quarter from 7.95% in the previous three months.
In the services sector, which makes up more than half of the nation’s GDP, growth slowed last quarter as global demand for financial services moderated. Agriculture also weakened because of below-normal rains, which resulted in a weaker summer crop harvest.“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 growth presents a dilemma for the central bank, which is trying to keep inflation at its 4% target on a sustained basis. The RBI has left interest rates unchanged for four policy meetings now, although it’s maintained a fairly hawkish stance.
The RBI is likely to keep interest rates on hold on Dec. 8, with the GDP figures indicating there’s no urgency for the RBI to cut rates yet.