India's growth speeds up in after-glow of Modi's triumph

A labourer works at the construction site of a residential complex in Kolkata August 29, 2014.

BY RAJESH KUMAR SINGH-NEW DELHI Fri Aug 29, 2014 

(Reuters) - The after-glow of Narendra Modi's election victory nearly four months ago helped India's lumbering economy register its fastest growth in two-and-a-half years for the quarter ending in June.

Gross domestic product grew a faster-than-expected 5.7 percent year-on-year, a government data showed on Friday, sharply higher than a provisional 4.6 percent expansion in the previous three months.

The last two years marked the longest spell of growth of less than 5 percent in a quarter of a century, and Modi must spur the economy to far faster growth to provide jobs for increasing numbers of youth joining the work force, and to lift millions out of poverty.

"We are at the starting point of the pickup in the growth cycle in India," said Sonal Varma, an economist with Nomura. "This data gives us the first sign into that."

She expects the economy to expand 6 percent year-on-year in the fiscal year to March 2015, higher than 5.5 percent estimated by the Reserve Bank of India and faster than a near decade-low of 4.7 percent last year.

India's new prime minister has promised to make it easier to do business through speedier clearances and stable tax policies, giving investors in Asia's third-largest economy hope of a rosier future after years of low growth and high inflation.

That hope has led to a marked increase in foreign capital inflows to the country - even before the election - making Indian shares the best performers in Asia this year.

Even though Modi is yet to launch big-bang reforms needed to propel the economy back to a near double-digit annual growth, his three-month-old administration has received a big thumbs-up from Indian corporates.

An overwhelming majority of CEOs in two polls, published by two national dailies on Thursday, credited Modi for reviving business confidence.

Aiding the sentiment, the global economy is showing signs of strengthening and is expected to lift overseas demand for Indian merchandise and underpin the recovery.

"We believe economy is definitely on a path of improvement," said Shubhada Rao, chief economist at Yes Bank in Mumbai. "For the full year, we could see a 60 to 80 basis points improvement from the last year."

STRUCTURAL REFORMS

However, without an overhaul of India's strained public finances, stringent land acquisition laws, chaotic tax regime and rigid labour rules, economists say, a broader and sustained economic revival will likely remain elusive.

Modi was expected to replicate his success as head of Gujarat state in breaking the political logjam in New Delhi that had blocked efforts to push these structural changes.

But a lack of majority in the Rajya Sabha means some of these measures cannot be carried out without bipartisan support. That has already delayed plans to increase foreign ownership caps in the insurance and pensions sector and revamp labour laws.

"For India's better economic performance to be sustained, the government will have to follow through on politically costly measures," said Bill Adams, senior international economist for PNC Financial Services Group.

The improvement in the latest GDP figures is in large measure due to the steps taken by the previous government to kick-start investments and spur consumer demand, which have led to a revival in manufacturing and mining activity.

Year-on-year growth was also helped by a favourable statistical base because of weak economic activity last year.

A wider economic recovery is still some distance away. Soaring prices of essential food items have squeezed India's consumers.

With private spending accounting for 60 percent of the economy, that bodes ill for a faster turnaround. It grew 5.6 percent on year in the June quarter compared with an 8.2 percent rise three months ago.

A weak consumer demand is also weighing on capital investments, which barely grew in the past two years. The sector, which contributes little over 32 percent to India's GDP, posted an annual growth of 7 percent, helped largely by a favourable statistical base.

"A strong recovery is not on the cards until ... greater efforts are made at reducing structural bottlenecks," said Shilan Shah, an analyst at macro-research firm Capital Economics.

(Additional reporting by Zeba Siddiqui in Mumbai; Editing by Robert Birsel and Alison Williams)