India's economy grew 8.8 percent in June quarter

MUMBAI — India's economy grew 8.8 percent in the June quarter, its fastest pace in over two years, as good farm and manufacturing output lifted growth back to its pre-crisis trajectory.

The latest quarter's growth rate was bolstered by a comparison with the economic doldrums in the year-earlier period. Economists say the pace will begin to ease as that effect wears off and central bank rate hikes begin to be felt in Asia's third-largest economy.

India's economic expansion averaged nearly 9 percent before the Great Recession, which dragged growth this time last year to 6 percent — the last quarter before India's economy began to rebound.

A CNBC-TV18 poll had forecast 8.9 percent growth for the April-June period and Tuesday's numbers are unlikely to jolt the central bank from its path of monetary tightening. The Reserve Bank of India has raised key interest rates four times this year in a bid to tame high inflation, but economists say the effect of those hikes has yet to filter out to the real economy.

Yes Bank chief economist Shubhada Rao said she expects interest rates to rise another half percentage point in the coming months. "Inflation concerns would still preoccupy monetary policy. We do see some more tightening left."

The benchmark Sensex index was down 0.7 percent at 17,892.49 in afternoon trading on the Bombay Stock Exchange.

Despite the glittering headline numbers — quarterly manufacturing output surged 12.4 percent, record auto sales in July, telephone connections up 36.7 percent in the quarter — economists say consumer demand remains narrow and the shadow of global economic uncertainty is constraining capital spending and could disrupt industrial production and credit growth.

"In terms of sustainability, the growth number will settle around 8.5 percent. There will be a deceleration," said Enam Securities economist Sachchidanand Shukla.

"Global uncertainty has taken a toll," he said. "The most important factor is not interest rates or availability of funds. It's got to do with confidence. Every two months, you're seeing a spate of bad news." Industrialists with big investment plans would "rather wait and watch" in that environment, he said.

India has been sheltered from the global storm by strong domestic demand and rising wages, but Shukla says consumer spending has been restricted to the rich and middle class, who are splurging on cars, two-wheelers and plasma televisions. Basic consumer goods — like shampoo and soap, which India's poor buy in small, super-cheap packets — have not seen a comparable uptick.

Headline inflation during the quarter was 10.6 percent. That has hurt India's poor the most, because they spend a greater slice of their income on food, which has seen the worst price rises.

Shukla says that though India is far less dependent on exports than neighbors like China, some 40 percent of industrial production is influenced by external factors, like commodity prices and export demand.

In addition, as Indian giants like the Tata group — now the U.K.'s largest manufacturing employer — and the Essar group — whose Essar Energy debuted on the London Stock Exchange in May — start to realize their global ambitions, they become more vulnerable to demand and credit conditions in the U.S. and Europe.

"It's important for India now to maintain this growth trajectory," Shukla said. "If we fail, India will see a problem in the sheer number of people lacking goods and necessities. Unless we grow at 8 percent plus, we're looking at a grim scenario."

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Associated Press writer Ashok Sharma contributed to this report from New Delhi.