India economy grew 8.6 percent in Jan-Mar quarter, best in 2 years as manufacturing rebounds

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India’s economy grows at fastest pace in 2 years

MUMBAI, India — A rebound in manufacturing and recovering farm output drove India’s quarterly economic growth to 8.6 percent, the best in two years as Asia’s third-largest economy returns to pre-crisis levels of expansion.

Growth for the financial year ended March was 7.4 percent, beating a government forecast of 7.2 percent, officials said Monday. The acceleration in the January-March quarter is likely to add to pressure on the central bank to raise interest rates to contain inflation.

India has rebounded from the global downturn faster than expected thanks to strong domestic consumption and investment, but two uncertainties loom: Rain and Europe.

As India’s farmers wait for the monsoon, hoping last year’s drought won’t be repeated, the nation’s business elite watches Europe — which accounts for a fifth of India’s exports — hoping its sovereign debt crisis won’t dampen the investment that’s needed to drive growth.

Manufacturing surged an unsustainable 16.3 percent off a low base for the March quarter, up from 0.6 percent a year earlier and its strongest performance in at least two years. Agriculture — which remains an important source of employment — limped along at 0.7 percent, up from the prior quarter’s contraction of 1.8 percent, but worse than a year earlier, when it grew 3.3 percent.

“We remain vulnerable to the monsoons, as ever,” said Enam Securities economist Sachchidanand Shukla. “This is an annual uncertainty that can shave off 60 to 70 basis points (0.6 to 0.7 of a percentage point) from growth. If the monsoon were to fail again, growth will definitely slip below 8 percent.”

He said an unusually bountiful winter crop boosted growth after the worst rainfall since 1972 diminished summer yields.

Monday’s figures showed that investment is becoming a key driver of growth as private consumption falls as a share of overall economic activity.

“It’s a sign of India moving on to a higher growth trajectory,” said D.K. Joshi, chief economist at Crisil, an Indian research and ratings agency. “Investment has picked up really fast and is at par with other economies when they started lifting on a sustained basis.”

Investment as a share of gross domestic product rose to 34.6 percent during the March quarter, government data showed. That’s far higher than it was in the 1990s, when it hovered near 22 percent of GDP, and close to its peak of 37 percent not long before the global recession, Joshi said.

Europe, India’s most important export market, could drag on India, especially if its debt crisis undermines global growth.

Joshi calculates that only about 7 percent of investment comes from abroad. Still, if foreign funding — which Indian companies have used to feed their growing appetite for overseas acquisitions — dries up, domestic sources will be stretched, he said.

“We are more connected to Europe than ever, but we have our own strengths,” he said.

From 2003-2008, economic growth averaged 8.8 percent a year, before slumping to 6.7 percent last fiscal year as the Great Recession roiled India’s economy.

India’s prime minister Manmohan Singh says the billion-plus nation needs to grow at 10 percent a year to eradicate chronic poverty.