India's economy grows at fastest pace in a year in June quarter, monsoon risk seen

© Reuters. FILE PHOTO: An employee works inside an engineering goods export unit in the manufacturing hub of Faridabad on the outskirts of New Delhi, India, January 13, 2023. REUTERS/Manoj Kumar/File Photo

By Shivangi Acharya and Nikunj Ohri

NEW DELHI (Reuters) -India's economy grew at its quickest pace in a year in the April-June quarter, buoyed by strong services activity and robust demand, but a drier than normal monsoon season could restrain future growth.

Gross domestic product (GDP) expanded 7.8% on an annual basis in the June quarter, accelerating from 6.1% growth recorded in the March quarter and topping a 7.7% forecast in a Reuters poll.

It was also the highest reading since the equivalent period of 2022, when growth stood at 13.1%.

India remains one of the fastest growing major economies, especially as China's post-pandemic recovery has slowed. India's Chief Economic Adviser V. Anantha Nageswaran maintained his 6.5% growth forecast for the full year. "Growth prospects appear bright, though external factors pose a downside risk," Nageswaran said.

Capital Economics' Thamashi De Silva said India's GDP data was strong despite policy tightening by the Reserve Bank of India. The RBI has raised its interest rate by 250 basis points since May 2022.

"The push is provided by the services sector where both trade, transport and finance and real estate have grown by 9.2% and 12.1% in high base growth rates," said Madan Sabnavis, economist at Bank of Baroda.

Construction activity growth was also strong at 7.9%.

But most economists warned that dry conditions could hurt growth in the coming quarters.

India is likely to receive an average amount of rainfall in September, after the driest August in more than a century.

"Going forward, we need to watch for risks to the agriculture sector, sustenance of capex push from central and state governments, global demand conditions, and lagged impact of interest rate hikes," said Suvodeep Rakshit, senior economist at Kotak Institutional Equities.

In the April-June quarter, private consumption, which accounts for nearly 60% of the economy, grew about 6% year-on-year, up from 2.8% in the March quarter, while manufacturing expanded 4.7%, compared with 4.5% in the previous three months.

However, growth in capital formation, an indicator of investment, eased to about 8% year on year from 8.9% in the previous three months.

INFLATION RISK

India's retail inflation in July rose to its highest in 15 months as vegetable and cereals prices skyrocketed.

Due to weak reservoir levels, prices of commodities have to be watched, Nageswaran said, adding that "there is no real possible concern inflation will spike out of control."

Some economist have a different view and expect dry weather could constrain spending.

"High food inflation for a prolonged period could weigh on consumption growth," said Rajani Sinha, Chief Economist, CareEdge Ratings.