India’s manufacturers and service industries have been struggling to overcome disruptions from the bumpy launch of a national sales tax in July.
In the quarter to December, however, annual growth in the manufacturing sector climbed to 8.1 per cent from 6.9 per cent in the previous quarter, while financial and other services grew at 7.2 per cent from 5.6 per cent.
“Settling down of goods and services tax reforms will boost growth in the next fiscal year,” said Ms Anita Gandhi, a director at Arihant Capital Markets.
Some economists expect the Reserve Bank of India (RBI) – which is trying to balance concern over inflation with support for growth – to raise interest rates after its next policy meeting on April 5.
“We expect a rate hike from RBI, most likely at the August review,” economist Abhishek Upadhyay from ICICI Securities Prime Dealership said, citing inflationary pressures.
The central bank has kept its key rate unchanged since a 25 basis-point cut in August. Retail inflation eased marginally to 5.1 per cent in January from a 17-month high of 5.2 per cent in December.
RBI governor Urjit Patel this month said the economic recovery was at a nascent stage and called for a cautious approach.
Wednesday’s data is likely to be welcomed by Prime Minister Narendra Modi. Last week, he said his government was determined to put the economy back on a higher growth trajectory, but it is still far from firing on all cylinders.
Mr Modi faces criticism over mounting bad loans at state banks and a US$1.77 billion (S$2.3 billion) fraud at state lender Punjab National Bank – the biggest in the country’s banking history.
Meanwhile, Mr Modi is trying to accelerate growth through higher state spending, including 2.1 trillion rupees (S$43 billion) for the recapitalisation of state banks, which are beset with mounting bad loans of nearly US$148 billion.
He has stepped up spending on infrastructure and welfare projects to boost growth ahead of elections next year. This has widened the fiscal deficit for the year ending in March, to 3.5 per cent of GDP from the 3.2 per cent projected earlier.
Creating jobs for nearly one million young people entering the market every month has been a key challenge, and he raised import tax on almost 50 items this month to support domestic manufacturers.
In November, Moody’s raised India’s investment grade rating one notch – the agency’s first upgrade in nearly 14 years – but cautioned against macroeconomic risks.
India grew at more than 9 per cent a year from 2005 to 2008. Higher oil prices and increased pressure on market borrowings from the government have already increased bond yields, and this is likely to hit private investment and growth further.
Growth in factory activity hit a four-month low last month as new orders eased and weighed on output after manufacturers raised prices at the fastest pace in a year, a private business survey showed.
Analysts said bad loans in banks and inflationary risks arising from high food and crude prices pose risks to growth.