Indian Economy Grows 13.5 percent in April-June Quarter, Fastest in a Year

The Indian economy grew 13.5% year on year in the April-June quarter, the fastest rate in a year, but less than economists, analysts, and the Reserve Bank of India had predicted. GDP increased by 13.5 percent year on year in the three months to June 30, compared to 4.1 percent in the January to March quarter.

The last time GDP grew at a faster rate was in April-June 2021, when it was 20.1 percent higher than the pandemic-depressed level of the previous year. The Chinese economy expanded by 0.4% in the April-June quarter. The RBI predicted earlier this month that GDP growth would be around 16.2% in the first quarter (April-June) of this fiscal year.

A Reuters poll of economists predicted the economy would grow 15.2% year on year in the April-June quarter, while a Bloomberg poll predicted 15.3%. Many prominent analysts predicted that the base effect would cause the Indian economy to grow at a double-digit rate.

Rating agency ICRA predicted that GDP would grow at a rate of 13% in April-June 2022, while the State Bank of India projected a rate of 15.7% in its report. "The strong June-quarter real GDP growth print of 13.5%, albeit slightly lower than our expectation of 15.0%, is essentially a reflection of a rather low statistical base effect as well as pent-up demand following the exit from the Omicron wave during the March quarter," said Kunal Kundu, India Economist at Societe Generale.

"There is also a clear shift in demand toward services, particularly for contact-intensive services. However, there are signs that the intensity of the tailwind generated by economic reopening is waning "He stated. 

Indeed, as a result of the government relaxing travel restrictions due to the virus, the nation's massive services industry, in particular, saw a surge in domestic demand.

According to the data, private investment increased by 20.1 percent year on year in the April to June quarter. While private consumption increased by 25.9%, government spending increased by 1.3%. With retail inflation exceeding the central bank's medium-term target of 2-6 percent this year and expected to remain high for the rest of 2022, the Reserve Bank of India (RBI) was forced to raise interest rates reluctantly.

Since May, the RBI has raised its benchmark repo rate by 140 basis points, including 50 basis points this month, while warning about the impact of a global slowdown on domestic growth prospects. Even though monthly inflation has slowed over the last three months, the rise in food and fuel prices has had a significant impact on consumer spending, which accounts for nearly 55% of economic activity.

"India's economic recovery process will likely continue to be weighed down by rather weak labour market recovery and quite benign wage outlook hinting at weak domestic consumption outlook," said Kundu of Societe Generale.

"This would imply that, while we are confident that the pace of inflation easing will be gradual, the RBI is nearing the end of its current rate hike cycle." Rather than continuing to raise rates until inflation falls to the median target of 4%, the RBI would stop raising rates by the end of 2022, even if the real policy rate remains negative, once they are convinced of easing price pressures," he added.

However, in a note to clients last week, Shah warned that the economy faced downside risks because tighter monetary conditions and rising input costs would affect companies' investment plans. Imported goods are now more expensive for individuals and businesses as a result of the rupee's more than 7% depreciation against the dollar this year.

Other data released for India on Wednesday showed that core sector output, or output from infrastructure factories, increased by 4.5% year on year in July. In April-July of this fiscal year, production growth in eight infrastructure sectors (coal, crude oil, natural gas, refinery products, fertiliser, steel, cement, and electricity) was 11.5 percent compared to 21.4 percent a year ago.