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Economy

Indian economy breaks slump, growing 6.3% in second quarter

Business activity recovers from currency ban, new nationwide tax

A metal worker making pipes in Mumbai   © Reuters

NEW DELHI -- India's gross domestic product expanded by 6.3% in the July-September quarter, according to official data released Thursday, indicating that businesses have begun to recover from the move last year to ban high-value currency bills and the rough rollout of a new goods and services tax.

In April-June, the first quarter of the current financial year, growth had slumped to 5.7%, the lowest in 13 quarters. The economy expanded 6.1% in the January-March quarter.

A Reuters poll of economists had estimated GDP growth of 6.4% on the year in July-September. Though the reported expansion of 6.3% is the best this calendar year, it still fell far short of the 7.5% recorded in the same quarter last year.

"After almost five quarters of declining GDP growth, we see a reversal of trend," India's chief statistician, T.C.A Anant, told reporters. "It is very encouraging."

Manufacturing and utilities such as electric power are among the sectors that performed strongly, while agriculture is estimated to have grown just 1.7%.

Finance Minister Arun Jaitley said the GDP expansion was supported by rapid growth in manufacturing, which increased from 1.2% in the first quarter to 7% in the second.

Robust growth of 7.6% for electric and other utilities, and a 9.9% rise in trade, transportation and communications, also powered this acceleration. Overall, the services sector expanded 7.1% in the second quarter, Jaitley said, adding that real private consumption growth has broadly held steady at 6.5%.

The finance minister said the economy seems to have weathered the transitional challenges experienced earlier in the year and appears poised for a durable recovery.

Boost to Modi

The pickup in growth, meanwhile, is expected to give a major boost to Prime Minister Narendra Modi's election campaign in his home state of Gujarat in India's west, which goes to the polls in two phases in December.

Modi and his government have faced severe criticism from opposition parties for last November's demonetization drive that sucked some 15.4 trillion rupees ($238 billion), or 86% of the money in circulation, from the cash-heavy economy, and a hasty implementation of the GST, which involved complex tax-filing procedures.

Reacting to the GDP numbers, Commerce and Industry Minister Suresh Prabhu said the fundamentals of the Indian economy are getting stronger, and the benefits of structural reforms by Modi will boost GDP in the future.

Piyush Goyal, minister of railways and coal, tweeted: "Transformational reforms under [the] PM ... [are] bearing fruit through faster growth and prosperity for all. Quarterly GDP growth accelerates to 6.3% vs 5.7% in the previous quarter."

Mamata Banerjee, the chairperson of the opposition Trinamool Congress and chief minister of West Bengal state, however, pointed out that growth reached 7.5% in the second quarter of last year. "This government only [gives] bhashan, [and takes] no action," she added, using the Hindi word for lectures.

Upward revision soon?

N.R. Bhanumurthy, a professor at the New Delhi-based National Institute of Public Finance and Policy, told the Nikkei Asian Review that "these are very positive numbers, particularly on the back of two large policy shocks."

He also said that he expects the second-quarter growth rate to be revised upwards in coming months. "It would be closer to 6.5% rather than 6.3% because these estimates are largely based on tax information which is not available for many of the services right now," he said.

Most importantly, bigger sectors like manufacturing, mining and electricity have seen a significant recovery, Bhanumurthy said. However, the construction sector -- which grew 2.6% -- remains a cause of concern, he said.

Bhanumurthy forecasts full-year growth of 7.1%. "I have been bravely saying this for a simple reason that the confidence channel should have a significant positive impact in the overall growth. This already is showing up in foreign investment and there is also a sharp recovery in export demand."

Earlier this month, Moody's Investors Service raised India's sovereign rating -- the first upgrade in nearly 14 years -- from Baa3 to Baa2, and changed the outlook to stable from positive. "The decision to upgrade the ratings is underpinned by Moody's expectation that continued progress on economic and institutional reforms will, over time, enhance India's high growth potential," the ratings agency said.

In October, the International Monetary Fund said it expected India's economy to grow by 6.7% in 2017, slower than the 7.2% it had forecast in April, due to the lingering impact of the government's sudden demonetization exercise and the new goods and services tax.

Macroeconomic research agency Capital Economics, which had estimated 6% growth for the July-September period, said that "the broad trajectory of a pickup in growth seems reasonable, and we think the economy will continue to strengthen over the coming quarters."

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