Economy Grows 13.5% In June Quarter; Fastest Pace Of Expansion In A Year

India's economy grew 13.5 per cent in the April-June quarter from a year ago, its fastest annual expansion in a year, but lower than broadly predicted by economists, analysts and the Reserve Bank of India.

Gross domestic product (GDP) in the three months to June 30 was 13.5 per cent higher than a year earlier, compared to 4.1 per cent in the January to March quarter.

The last time GDP hit a higher annual growth was in April-June 2021 when it was 20.1 per cent higher than the pandemic-depressed level of a year before.

China's economy grew 0.4 per cent in the April-June quarter.

The RBI stated earlier this month that the GDP growth rate would probably be around 16.2 per cent in the first quarter (April-June) of this fiscal year.

A Reuters poll of economists had predicted the economy would grow 15.2 per cent year-on-year in the April-June quarter, while a Bloomberg survey had it at 15.3 per cent.

Many prominent analysts had also projected that the Indian economy would expand at a double-digit growth rate due to the base effect.

PTI reported that rating agency ICRA had predicted that the GDP was likely to grow at 13 per cent, while the State Bank of India, in its report, projected the growth rate at 15.7 per cent for April-June 2022.

"The strong June-quarter real GDP growth print of 13.5 per cent, albeit slightly lower than our expectation of 15.0 per cent, is essentially a reflection of a rather low statistical base effect and also a reflection of pent-up demand following the exit from the Omicron wave during the March quarter," Kunal Kundu, India Economist at Societe Generale, told Reuters.

"What is also clear is a distinctive shift in demand toward services, particularly for contact intensive services. However, we are seeing signs of waning of the intensity of tailwind generated by economic reopening," he said.

Indeed, the nation's enormous services industry, in particular, saw a surge in domestic demand as a result of the government easing travel restrictions due to the virus.

According to the data, private investment rose 20.1 per cent in the April to June quarter from a year ago. While private consumption increased by 25.9 per cent, and the government spending rose by 1.3 per cent.

But the pace was expected to slow this quarter sharply and in the next two as higher interest rates hit economic activity.

With retail inflation above the upper limit of the central bank's medium-term target of 2-6 per cent this year and predicted to stay elevated for the rest of 2022, the Reserve Bank of India (RBI) was forced to hike rates reluctantly.

The RBI raised its benchmark repo rate by 140 basis points since May, including 50 basis points this month, while warning about the impact of a global slowdown on domestic growth prospects.

The increase in the cost of food and fuel has significantly impacted consumer spending, which makes up nearly 55 per cent of economic activity, even as monthly inflation has subsided over the past three months.

"India's economic recovery process will likely continue to be weighed-in by rather weak labour market recovery and quite benign wage outlook hinting at weak domestic consumption outlook," Societe Generale's Mr Kundu, told Reuters.

"This would mean that while we are convinced pace of easing of inflation would be slow, RBI is not far away from the end of its current rate hike cycle. Rather than staying on course until inflation comes down to the median target of 4.0 per cent, RBI would stop hikes by end of 2022 even if the real policy rate remains negative once they are convinced of decelerating price pressure," he added.

Still, forward-looking data show that Asia's third-largest economy is coping well despite deteriorating global economic conditions.

"More timely data suggest that resilience has continued in Q3 (July-September) too," Shilan Shah, India economist at Capital Economics, Singapore, told Reuters and added that the economy had better resisted the impact of the Omicron wave in January-March than it had coped with the previous wave of the pandemic.

However, Mr Shah warned in a note to clients last week that the economy faced downside risks because companies' investment plans would be affected by tighter monetary conditions and rising input costs.

Imported goods are now more expensive for individuals and businesses due to this year's depreciation of the rupee against the dollar of more than 7 per cent.

Other data releases for India on Wednesday showed the core sector output, or the infrastructure factories output, expanded 4.5 per cent year-on-year in July.

The production growth of eight infrastructure sectors -- coal, crude oil, natural gas, refinery products, fertiliser, steel, cement and electricity -- was 11.5 per cent in April-July this fiscal against 21.4 per cent a year ago.