Channel NewsAsia

India's economy grows 5.7% in Q1, highest in 2 years

India's economy grew by 5.7 percent in the first financial quarter, its fastest pace in over two years, data released Friday showed, as the election of a new right-wing government spurred investor confidence.

NEW DELHI: India said on Friday (Aug 29) 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 economy's 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. Manufacturing output grew by 3.5 per cent in the first quarter from a year ago while farm production rose by 3.8 per cent. Construction activity increased by 4.8 per cent.

India has been mired in its longest spell of sub-five-per cent growth in a quarter-century. But new Prime Minister Narendra Modi, who led his party to the first single-party majority in three decades in India's lower house of parliament, is perceived as more business friendly than the previous left-leaning Congress government.

Analysts say the right-wing Bharatiya Janata Party (BJP)'s election victory has boosted confidence, and money has flooded back into the Indian stock market. 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.

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.


Last month, the central bank forecast growth of 5.5 per cent in the financial year to March 31, 2015, saying the economy was "poised to make a shift to a higher growth trajectory". The central bank's target was slightly below the government's target of 5.8 percent.

In the past two years, growth slowed to around half of the near double-digit levels seen a few years ago, hit by high interest rates to curb stubborn inflation, a weaker global economic backdrop and a fall in foreign investment as corruption scandals embroiled the Congress government.

Economists say India needs at least eight to nine per cent growth to create jobs for a ballooning youth population. To help boost growth, Modi has pledged to hasten introduction of a long-awaited goods-and-services tax to replace India's patchwork of levies that make business transactions more complex and costly. He has also eased foreign investment ceilings and sought to reduce India's notorious bureaucratic red tape to make it easier for investors to do business.

In one tangible sign of change, Modi 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.

Modi has also grouped departments under super-ministries to simplify administration and accelerate decision-making. Modi has also been seeking to jumpstart India's investment pipeline by easing a cumbersome bureaucratic approval process but many big-ticket industrial projects remain stalled by environmental concerns and other factors.

He has urged foreign companies to set up shop in the country, telling them "Come, make in India. Sell anywhere, but manufacture here." 

Tweet photos, videos and updates on this story to  @channelnewsasia