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India's economy grows 13.5% in April-June, slowdown expected

Expansion driven by manufacturing and services, including tourism

Laborers load consumer goods onto supply trucks at a wholesale market in Kolkata, India.   © Reuters

NEW DELHI (Reuters) -- India's economy grew at its fastest pace of 13.5% year-on-year in the April-June quarter though economists said growth is likely to lose momentum in coming quarters as higher interest rates cool economic activity.

June quarter growth, driven by manufacturing and services, such as accommodation and travel and rebounding from pandemic curbs, came in below a 15.2% forecast by economists in a Reuters poll, but well above 4.1% growth in the previous quarter.

The last time India's economy grew faster was in April-June 2021 when it gained 20.1% from the pandemic-depressed level a year earlier.

Manufacturing grew to 6.5% growth after a 0.2% contraction in the previous quarter while the construction sector grew 16.8% after 2.0% growth in the previous quarter, data showed.

Economists said Asia's third-largest economy faced downward risks with tighter monetary conditions and higher energy and commodity prices expected to weigh on consumer demand and companies' investment plans.

Kunal Kundu, economist at Societe Generale in Bengaluru, said India's economic recovery process would be impacted by a weak labor market recovery and slowing domestic consumption.

"For FY23, we expect the real GDP to grow by 7.1% y/y, though a lower print (rate) would not surprise us."

The Reserve Bank of India (RBI) has raised its benchmark repo rate by 140 basis points since May, including 50 basis points this month, while warning about the impact of a global slowdown on domestic growth prospects.

The latest Reuters poll showed economists anticipated growth this quarter could slow sharply to an annual 6.2% before decelerating further to 4.5% in October-December.

The rupee's depreciation of more than 7% against the dollar this year has made driven up the cost of imported items for consumers and businesses.

India's near $3 trillion economy, with a per capita income of around $2,100, has grown less than 2% a year in real terms on average over the past three years after contracting 6.6% in 2019/20, which largely coincided with the coronavirus pandemic.

Consumer spending, which accounts for nearly 55% of India's economic activity, has been hit hard by soaring food and fuel prices, though monthly inflation has moderated over the past three months.

Growth in consumer spending slowed to 2.6% year-on-year in the April-June quarter from 12.3% in the previous quarter, Wednesday's data showed.

Investment growth rose to 20.1% year on year compared with a 15.9% increase in the previous quarter, with state spending slowing to 1.3% growth after a 13.2% rise in January-March.

Still, this has not created enough jobs to keep up with the large numbers of young people entering the work force.

Fear of global recession remains an evolving risk for export-focused sectors such as IT, automotive, and industrials.

Suvodeep Rakshit, economist at Kotak Institutional Equities, said that while services have seen some rebound, downside risks were seen increasing from the second half of the current financial year due to external factors.

"We remain cautious on domestic growth too, though India is likely to perform relatively better than other economies."

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