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Wednesday, June 01, 2016

India’s Economic Growth Picks Up Pace, Accelerating to 7.6%
Expansion in service industries continued to drive annual growth
Photo: The Economic Times
NEW DELHI—Brisk consumer spending propelled growth in India’s economy to 7.6% in the year that ended March 31, the fastest pace in at least four years despite indications that some areas of Asia’s third-largest economy are still struggling.

The latest yearly growth reading matched the forecast issued by the Central Statistical Office in February. Year-over-year output growth in the January-through-March period was 7.9%, a significant step up from the 7.2% expansion recorded in the previous quarter.

Strong expansion in service industries like trade, finance and real estate—longtime pillars of India’s rise—continued to drive annual growth. But manufacturing also grew 9.3%, a sharp increase over the 5.5% recorded in the previous financial year. Farm output expanded by 1.2%, having contracted 0.2% the year before.

India’s recent performance has put the country atop the growth ladder among big countries, including China. But uncertainty has dogged India’s triumphant numbers since early last year, when government statisticians modified the way they estimate gross domestic product. The revised statistics were at odds with ground-level signs of weakness, sending India-watchers looking for alternative gauges of the economy’s health.

“Because it’s been a year now, people have found their way around” the new figures, said Pranjul Bhandari, HSBC’s chief India economist. “But largely, nobody seems fully comfortable with the number.”

With anxieties running deep about prospects in other large economies, however, executives, investors and international agencies still see India as standing apart. Foreigners poured $40 billion into the country as direct investment in the latest fiscal year, a 29% increase over the year before.

And indeed, there are some signs of late—from corporate earnings to cargo traffic and cement demand—that the country’s economy is humming along nicely, if not as spectacularly as its GDP figures suggest.

The government has forecast ample monsoon rains this summer, which would lift farm output and spending in the countryside after two dry years. A coming pay rise for government workers is also expected to bolster sales of everything from motorcycles to residential property.

So far, though, factory production has been anemic—the official indicator of industrial volumes barely grew in March. Exports have been falling for more than a year. Companies still aren’t investing strongly in new facilities, equipment and other building blocks of growth.

“The turnaround is going to be gradual—a little more protracted than people expected,” said Rajeev Malik, an economist at Hong Kong-based brokerage CLSA. Private investment is “going to be the last piece that falls into place,” he said, “simply because so many things have to be sorted out before that happens.”

Prime Minister Narendra Modi, whose administration completed its second year in May, defended his stewardship of the economy in an interview with The Wall Street Journal last week. Budget and current-account deficits have been curtailed, he said. Restrictions on foreign investment have been loosened.

“In two years, we have done a lot to position India to thrive in the changing world,” Mr. Modi said.

Yet some economists fear that one key aspect of the environment that has boosted Indians’ purchasing power and appetite for investment may be poised to turn.

Inflation in India has been tamed gradually over the past two years. But some analysts and central-bank officials now say they are bracing for a comeback. Soaring food prices caused overall consumer inflation to jump to 5.4% in April, even as companies report that they don’t feel confident enough about demand to raise product prices.

This disconnect suggests inflation hasn’t been the byproduct of a surging economy. Efforts to untangle structural factors that cause prices in India to be sticky—such as the country’s heavily controlled agricultural market—have progressed slowly.

On inflation, “there’s been too much chest-thumping by government,” said Mr. Malik, the CLSA economist. Although the Reserve Bank of India is now formally tasked with keeping price-growth stable, he said, “how successful it is, is in the hands of the government.”

Meanwhile, oil prices appear to be on the rise. The U.S. Federal Reserve is contemplating an interest-rate increase, which could hurt India’s currency and raise the cost of imports.

“I call this the ‘summer of suspense,’” said Ms. Bhandari, the HSBC economist. “There are so many things happening together that it’s very hard to take a full call on inflation.”

—Anant Vijay Kala contributed to this article.

Write to Raymond Zhong at raymond.zhong@wsj.com

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