India's April-June economic growth beats forecasts at 7.8% on surge in investment

By Shubham Batra

NEW DELHI, Aug 31 (Reuters) - India's economy grew ‌7.8% in the April-June ​quarter, government ​data showed on Monday, comfortably beating expectations as a surge in investment and manufacturing activity added to strong consumer demand in the South Asian economy.

The figure was higher than economists' expectations of 7.1% year-on-year growth in a Reuters poll, but ‌slower than the revised 8.6% growth in the previous three months. The Reserve Bank of India had projected ⁠first-quarter growth at 7%.

The stronger-than-expected start to the financial year for Asia's third-largest economy comes despite concerns over geopolitical tensions emanating from the U.S. war on Iran.

Prime Minister ‌Narendra Modi called India's GDP growth of ‌7.8% "a herculean feat", in a post on X.

"The collective strength of our people ensured India delivered such growth despite oil price shocks and supply chain issues in the midst of global uncertainties," he said.

Goods and services tax cuts and income tax reductions from ​earlier this year boosted consumer demand, with personal consumption rising 7.1% against 6.8% in the previous year, while private investment grew nearly 12% from 5.8% a year ago.

"Robust credit demand and resilient domestic consumption despite elevated prices further highlight the underlying strength of economic ⁠activity," said Tanay Dalal, senior vice president — business & economic research at Axis Bank.

Credit growth across sectors including farm, industry and services remained healthy, according to the RBI's August bulletin, with ​the highest loan growth of 18.3% in over a decade at the end of the June quarter.

Gross value added, a more accurate measure of underlying economic activity, grew 8.2% during the April-June quarter, the data ​showed. This measure strips out the volatile components of national accounts such ‌as indirect taxes and subsidies.

The manufacturing sector grew at 9.2% compared with 8.3% in the same period last year, while the financial services sector grew a robust 12.1% compared to 8.8%, driven by strong growth in ⁠bank credit.

"The key risks are now less about a softer domestic story and more about the persistence of high oil prices, rupee weakness and tighter global financial conditions. Scope for full-year growth to be north of 7% is high," said Radhika Rao, senior economist at DBS Bank.

India has been among the economies ⁠hardest hit by the Iran war, given its dependence on oil imports to meet nearly 85% of its crude needs and its heavy reliance on Middle ​Eastern supplies. Risks have intensified as crude prices continue to hover around $90 a barrel.

This has also clouded India's inflation outlook, with the central bank expecting the headline print to average about 5% in the current financial year, while posing risks to the fiscal and current account balances.

Minutes of the RBI's August policy ‌meeting showed that two members of the monetary policy committee, including the governor, favoured broad-based policy tightening if inflation quickened, keeping alive the possibility of a rate hike later this year.

A deficient monsoon also ‌poses growth and inflation risks as the season brings 70% of India's annual rainfall and is critical for agriculture and rural incomes, with nearly half of ⁠farmland lacking irrigation and millions dependent on farming for ‌their livelihood.

Growth in farm output, a sector ​which employs more than 40% of the country's enormous workforce, came in at 3.6% in the first quarter compared with a similar pace in the previous quarter.

(Reporting by Shubham Batra in New Delhi; Editing by Mrigank Dhaniwala ‌and Sharon Singleton)

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