India's economy is growing at its fastest pace in a year

Amit Dave/Reuters

India's economy is growing rapidly, but analysts expect a dry monsoon season and rising food prices could slow activity later this year.

India's economy grew at its fastest 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 slow future growth.

Gross domestic product (GDP) grew 7.8% on an annual basis in the quarter, accelerating from 6.1% in the three months to the end of March.

It was the highest since the June 2022 quarter, when growth was 13.1%.

India remains one of the fastest growing major economies, particularly as China's post-pandemic recovery has slowed. India's chief economic adviser V. Anantha Nageswaran maintained his full-year growth forecast of 6.5%.

“Growth prospects appear good, although external factors pose a downside risk,” Nageswaran said.

Thamashi De Silva of Capital Economics said India's GDP data was strong despite monetary policy tightening by the Reserve Bank of India. The RBI has increased its interest rate by 2.5 percentage points since May 2022.

“The impetus comes from the services sector, where trade, transport and finance as well as real estate grew at high base growth rates of 9.2% and 12.1%, respectively,” said Madan Sabnavis, economist at Bank of Baroda.

Construction activity also grew strongly at 7.9%.

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

India is expected to receive average rainfall in September, following its driest August in more than a century.

“Going forward, we need to pay attention to risks to the agricultural sector and livelihoods [capital expenditure] Pressure from central and state governments, global demand conditions and the 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 India's economy, grew about 6% year-on-year, up from 2.8% in the March quarter, while manufacturing grew 4.7% against 4.5% % in the last three months.

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

India's retail inflation rose to its highest in 15 months in July as prices of vegetables and grains surged.

Commodity prices need to be monitored due to weak deposit levels, Nageswaran said, adding: “There is no real concern that inflation could get out of control.”

Some economists disagree, saying dry weather could limit spending.

“Prolonged high food inflation could weigh on consumption growth,” said Rajani Sinha, chief economist at CareEdge Ratings.

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