Data released on Thursday showing faster growth could help Prime Minister Narendra Modi, who has been facing criticism over the hasty July launch of a goods and services tax (GST).
The tax was aimed at transforming India’s 29 states into a single customs union but it has hit millions of small businesses due to complex rules and technical glitches.
Gross domestic product grew 6.3% in July-September, its fastest pace in three quarters, compared with 7.5% a year earlier, the data showed.
Analysts polled by Reuters had forecast annual growth of 6.4% in the quarter. The economy has also broadly moved past the disruptions encountered after a shock ban on high-value banknotes in November 2016, economists said.
“Perhaps the impact of two very significant structural reforms – demonetisation and the GST is now behind us,” Finance Minister Arun Jaitley told reporters after the release of data.
“Hopefully, in the coming quarters we can look for an upward trajectory.”
Economic growth picked up from 5.7% in April-June, but lagged China’s 6.8 percent and the Philippines’ 6.9% for the three months through September.
Many private-sector economists expect faster growth in the current quarter and January-March as consumers and businesses step up spending and the global recovery gains traction.
Thursday’s data showed that the manufacturing sector grew 7 percent in the September quarter compared with 1.2% the previous quarter, as companies build up stocks ahead of the festival season.
Earnings for major Indian companies rose at their best pace in six quarters during July-September, according to Thomson Reuters Eikon data, showcasing how profits are finally looking up after a prolonged spell of sluggish growth.
Ratings upgrade
On Nov. 17, Moody’s upgraded India’s sovereign credit rating for the first time in nearly 14 years, saying continued progress on economic and institutional reforms would boost its growth potential.
The agency expects the economy to grow 6.7% in the fiscal year ending March 31, and 7.5% the following year.
Modi’s administration hopes the ratings upgrade can attract more foreign investors, who pumped US$15 billion into Indian equities in July-September, up 44% from the previous quarter.
The main NSE share index is up 25% in 2017.
Analysts said the Monetary Policy Committee of the Reserve Bank of India, which left the repo rate unchanged at 6% last month, could hold rates when it meets for a policy review next week.
“We expect RBI to remain on pause in December and February, given upside risks to inflation as well as the fiscal deficit,” said Sumedh Deorukhlar, economist, BBVA in Hong Kong.
Rising oil prices and a gradually tightening global rates environment pose new risks, he said.
Slowdown in spending
The world’s seventh largest economy, which grew at more than 9% a year from 2005 through 2008, is still far from firing on all cylinders. Domestic demand and private investment remain weak.
Analysts said the growth pick-up could have been sharper if not for a slowdown in government and consumer spending.
Government spending slowed in the quarter, growing just 1.3% year-on-year compared with near 17.2% year-on-year growth in the June quarter.
Annual growth in consumer spending, which powers more than half of the US$2.3 trillion economy, slowed to 1.5% in the September quarter from 6.7% in the previous quarter.
After front-loading state spending in the fiscal year’s first half, Finance Minister Jaitley has limited room to spend amid slowing revenue growth.
India reported a fiscal deficit of US$81.36 billion for April-October, or 96% of the budgeted target for the fiscal year.