India's economy expanded 7.8% year-on-year in the April-June quarter, blowing past forecasts as an investment boom and manufacturing strength added to already-solid consumer demand.
The figure handily beat the 7.1% growth economists had predicted in a Reuters poll, although it cooled from the previous quarter's revised 8.6% pace. The Reserve Bank of India had pencilled in just 7% growth for the first quarter of the fiscal year that began in April.
The upside surprise for Asia's third-largest economy landed even as geopolitical tensions from the US war on Iran continue to rattle global markets.
Prime Minister Narendra Modi hailed the numbers as "a herculean feat" in a post on X, declaring: "Doomsayers were doomed and India bloomed...yet again!"
Tax cuts — both for goods and services and on incomes — earlier this year lit a fire under consumer spending, with personal consumption rising 7.1%, up from 6.8% a year earlier. Private investment, meanwhile, doubled its pace, surging to close to 12% from just 5.8% previously.
"Robust credit demand and resilient domestic consumption despite elevated prices further highlight the underlying strength of economic activity," said Tanay Dalal, senior vice president for business & economic research at Axis Bank.
Credit is flowing freely across the economy: The RBI's August bulletin showed farming, industry and services sectors all posting healthy loan growth, with lending hitting an 18.3% pace at the end of the June quarter — the fastest in more than a decade.
Gross value added, a more accurate measure of underlying economic activity, grew 8.2% during the April-June quarter, the data showed. This measure strips out the volatile components of national accounts such as indirect taxes and subsidies.
Manufacturing sector growth sped up to 9.2% from 8.3% in the same period last year, while the financial services sector grew a robust 12.1% compared with 8.8%, driven by strong growth in bank credit.
"The key risks are now less about a softer domestic story and more about the persistence of high oil prices, rupee weakness and tighter global financial conditions. Scope for full-year growth to be north of 7% is high," said Radhika Rao, senior economist at DBS Bank.
India is one of the economies most exposed to oil supply disruptions emanating from the Iran war, as it imports nearly 85% of its crude needs — mostly from the Middle East — and crude prices are stuck near $90 a barrel.
"Globally, prices of petroleum products could pose a risk to global demand and therefore on the prospect of export growth in the coming years. So we need to keep our diversification efforts going on and also ensure cost competitiveness," Chief Economic Adviser V Anantha Nageswaran told reporters.
Exports have held up so far this fiscal year, but the oil price surge is muddying the inflation picture — the central bank expects headline inflation to average around 5% this year — while also threatening the fiscal and current account balances.
Minutes of the RBI's August monetary policy meeting showed that two committee members, including the governor, back broad-based tightening if inflation quickened, keeping alive the possibility of a rate hike later this year.
A deficient monsoon also poses growth and inflation risks. The season brings 70% of India's annual rainfall and underpins agriculture and rural incomes, yet nearly half of farmland lacks irrigation even as millions depend on farming for their livelihood.
Farm output — a sector employing more than 40% of India's workforce — grew 3.6% in the quarter, matching the previous quarter's pace.
