India's economy grows 5.7% in Q1, best in two years

NEW DELHI (AFP) - India said Friday its economy grew by 5.7 per cent in the first financial quarter, its fastest pace in over two years, as the election of a new right-wing government spurred business confidence.

The strong expansion in the three months to June beat a consensus market forecast of 5.5 per cent growth and marked the clearest sign yet that Asia's third-largest economy is accelerating out of a long slowdown, economists said.

"The economy has bottomed out - this really affirms that the green shoots we've seen are for real," Deepak Lalwani, head of India-focused financial consultancy Lalcap based in London, told AFP.

The first-quarter growth was faster than the 4.6 per cent expansion logged in the previous three months, and was the best performance since the January-to-March quarter in 2012.

Business, which has been staggering under India's longest spell of sub-five-percent growth in a quarter-century, was ebullient over the numbers.

They "reinforce faith in the India growth story", Chandrajit Banerjee, director-general of the Confederation of Indian Industry, said.

Growth was 4.7 per cent in the last financial year, around half of the near double-digit levels seen a few years ago, hit by high interest rates to curb inflation, a lacklustre global economy and a fall in foreign investment amid corruption scandals which embroiled the previous Congress government.

But the economy is seen as having got a new shot of energy under Prime Minister Narendra Modi, who led his party to the first single-party parliamentary majority in three decades.

The improved performance reflects stronger business and consumer spending fuelled by "optimism related to elections", Dariusz Kowalczyk, economist at Credit Agricole CIB Asia Research, said in a note to clients.

Modi, whose victory in May sent India's stock market surging, is perceived as more business friendly than the previous left-leaning government. He has urged foreign companies to set up shop in the country, telling them "Come, make in India."

But there is still caution about the months ahead.

India's monsoon rains, known as the lifeblood of the economy, have been weak, which is expected to stoke already high food inflation and keep interest rates elevated which could constrain investment.

The government also is striving to slash the fiscal deficit.

India's growth figures "come as welcome news. But we suspect that this might be as good as it gets for some time. Both fiscal and monetary policy look set to remain tight," said Shilan Shah, analyst at research consultancy Capital Economics.

Manufacturing output, which represents some 15 per cent of economic activity, grew by 3.5 per cent in the first quarter after shrinking by 1.2 per cent in the same year-ago quarter. Construction rose by 4.7 per cent.

But growth in farm output slowed, reflecting the patchy rains that are the main source of irrigation for farmers.

The central bank has forecast growth of 5.5 per cent this year, slightly below the government's target of 5.8 per cent. Economists say India needs at least 8 to 9 per cent per cent growth to create jobs for a ballooning youth population.

While Modi has introduced no so-called "big bang" economic reforms to boost growth, he has eased foreign investment ceilings and reduced India's notorious bureaucratic red tape to make it smoother for investors to do business.

Modi has clubbed departments under super-ministries to simplify administration and accelerate decision-making.

In another tangible sign of change, Modi has also ditched the Planning Commission - a relic of socialist policies put in place by India's first prime minister, Jawaharlal Nehru, who was impressed by the former Soviet Union's centralised planning and five-year economic blueprints.

But when India can move to a sharply higher growth trajectory hinges on "how quickly the infrastructure bottlenecks are removed and how quickly the investment cycle process picks up", D.K. Joshi, chief economist at leading Indian rating agency Crisil, told AFP.

"Our feeling is this is going to be a gradual movement," he said.

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