GDP Growth Accelerates to 7.4% in Q2, Rate Cut Unlikely

Higher manufacturing output pushed India's GDP growth to 7.4 per cent in the September quarter as compared to 7 per cent between April and June 2015.

Analysts said GDP growth in Q2 was in line with estimates; a Reuters poll had estimated GDP to expand by 7.3 per cent in Q2. (Read: India's economy grows faster than China)

"I think the second quarter figures give us a sense of satisfaction... We expect growth this year to be better than last year and even better the next year," Finance Minister Arun Jaitley said.

Manufacturing sector grew by 9.3 per cent in the September quarter as compared to 7.9 per cent in the same quarter last year. According to India Ratings & Research, manufacturing growth was highest in 12 quarters.

"And when manufacturing starts turning despite globally adverse circumstances, I think that's a very significant figure from our point of view," Mr Jaitley said. (Read more)

The surprise however was agricultural output, which rose 2.2 per cent versus 2.1 per cent in the corresponding quarter last year. The agricultural sector was expected to be a drag on growth on account of a second consecutive drought in many parts of the country.

"Agriculture continued to surprise positively... Continued growth momentum of financial sector and robust manufacturing growth (highest since 2QFY13) is encouraging," said DK Pant, chief economist of India Ratings & Research.

The services sector, which contributes nearly 60 per cent to the economy, however grew at 8.8 per cent year-on-year as against 10.4 per cent in the corresponding quarter last year.

Construction activities also witnessed a sharp slowdown, weighing on overall growth. Economists were puzzled with the sequential slowdown in consumption growth despite easing of inflation and rate cuts.

Stronger growth would be a boost for the Modi government, which has lined up a series of reforms in Parliament, analysts said. However, Monday's GDP data could persuade the Reserve Bank of India to keep interest rates unchanged on Tuesday, they said.

Although headline growth rates appear strong, that is in part the result of change in statistical methods that seek to capture more evidence of economic activity. Other barometers such as bank credit growth, jobs and consumer demand paint a less healthy picture, analysts say.