India's economy grows at its fastest pace in six quarters in election boost for Modi

India's economy grew at its fastest pace in one-and-half years in the final three months of 2023, led by strong manufacturing and construction activity and bolstering Prime Minister Narendra Modi's economic record just months before a national election.

Asia's third largest economy grew 8.4% in the October-December quarter, much faster than the 6.6% estimated by economists polled by Reuters and higher than the 7.6% recorded in the previous three months.

"The ongoing growth momentum is indicative of the Indian economy's resilience, notwithstanding global headwinds," said Sunil Kumar Sinha, economist at India Ratings, noting that industrial growth continued its good run in the quarter.

India has consistently beat market expectations and is ranked as one of the fastest-growing economies in the world, with China struggling to recover after the pandemic and the euro zone narrowly escaping a recession.

India revised its growth estimate for the current fiscal year to March 31 to 7.6% from 7.3%.

Such a strong showing in the last major economic data release before elections due by May could bolster Modi's chances after he made high economic growth one of his main platforms at rallies across the country.

The December growth "shows the strength of Indian economy and its potential," Modi said in a social media post.

Modi has sharply raised government spending on infrastructure and offered incentives to boost manufacturing of phones, electronics, drones and semiconductors to help India compete with likes of Vietnam and Thailand.

The manufacturing sector, which for the past decade has accounted for 17% of Asia's third-largest economy, expanded 11.6% year-on-year in the December quarter, while investment growth was above 10% for the second consecutive quarter, and the construction sector grew by more than 9%.

"Manufacturing sector growth was supported by lower input costs," said Rajani Sinha, Economist at CareEdge

Private consumption, accounting for 60% of gross domestic product (GDP), recovered slightly in the quarter, with a 3.5% year-on-year rise, compared with 2.4% in the previous three months.

Government spending contracted 3.2% year-on-year, compared with 1.4% growth in the previous quarter.

RURAL WEAKNESS

The farm sector, which accounts for about 15% of the $3.7 trillion economy, continued to struggle due to unfavourable monsoon rains. It contracted 0.8% in the December quarter, compared with 1.6% growth in the September quarter.

Slowing rural growth dragged down farm incomes and some farmers have hit the streets demanding higher procurement prices.

Rural weakness has lead to slower growth for major retail companies like Hindustan Unilever and Britannia Industries.

The pace of growth in real rural wages was around 1% in 2023 after contracting nearly 3% in the previous two years, according to ICRA, while average salaries in urban areas have been going up by nearly 10% a year.

However, policymakers remain optimistic on rural recovery.

"With the anticipated better value addition in the farm sector next financial year, rural demand growth and rural income growth will be even better and more evident in FY25," country's Chief Economic Adviser V Anantha Nageswaran said.