India’s economy grew at 8.9 percent in the second quarter, an acceleration from the brisk growth rate posted for the previous three months.
The figures surpassed analysts’ expectations that the economy would fall short of the 8.8 percent year-on-year growth it recorded in the April to June quarter.
Manmohan Singh, India’s prime minister, has forecast that the economy will expand 8.5 percent this year, after growing 7.4 percent last year, despite a severe drought that hit farm production and contributed to sky-rocketing food prices.
The prime minister predicts that an economy propelled by buoyant domestic demand has the capacity to climb towards 10 percent growth in the coming two years to rival Chinese rates of growth.
A Reuters poll had recorded predictions ranging from 7.2 percent to 9 percent for the latest quarter. Confirmation of the fast-growing output in Asia’s third largest economy by India’s statistical office will offer temporary respite to the Congress party-led government, which is currently beset by a number of damaging corruption scandals.
India’s strong economic growth comes against a background of tightening monetary policy as the Reserve Bank of India tries to encourage growth while fighting stubbornly high inflation. The central bank has steadily raised interest rates over the past year, unwinding an ultra-loose policy stance adopted to combat the effects of the global financial crisis.
The RBI is expected to pause until the first quarter of next year, when another 25 basis points rise in the repo rate, the rate at which the central bank lends to commercial banks, is likely. Another concern is the paucity of foreign direct investment at a time of increased short term capital inflows from the west.
Earlier this month, Duvvuri Subbarao, the governor of the RBI warned on the FT’s beyondbrics blog that India needed a “quantum step” in investment if it was to reach its goal of double digit growth. India has recorded a sharp 18.8 percent drop in its foreign direct investment inflows, to $10.78bn, during the first six months of 2010. CNN