India’s economy thrives on strong services growth

Despite higher interest rates, India’s economy is anticipated to perform strongly, driven by robust growth in both the services and manufacturing sectors.

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In the latest report, India’s economy is expected to perform well with strong services and manufacturing growth despite higher interest rates. GDP likely rose by 7.8% in the three months to June compared to a year ago, the fastest pace in a year, exceeding the 6.06% expansion in the previous three months.

Steady growth in India allows authorities to combat inflation before upcoming state elections. The central bank maintained rates and ordered liquidity control by banks, while export restrictions were imposed on some food staples by the government.

Rahul Bajoria, economist with Barclays Plc, said, “This growth print is likely to show domestic demand continues to propel the expansion, even as exports slow and monsoons remain uneven.” 

A 250 basis point rate hike since May 2022 and sluggish foreign demand for Indian goods will be partially balanced by increased government capital spending, driven by higher state revenues from tax collections. Retail inflation surged to a 15-month high of 7.44% in July, raising the likelihood of another rate hike.

This inflation may persist due to lower monsoon rains and dry El Nino conditions affecting crop production and food prices in the populous nation. Economists in a Bloomberg survey forecast 6.1% growth for the fiscal year ending in March 2024, slightly below the Reserve Bank of India’s estimate of 6.5%.

IT, hotels, and transport firms are expanding, potentially boosting the services sector, which contributes to over half of GDP. Financial services see double-digit credit growth, further aiding this trend.

Gaurav Kapur, chief economist, IndusInd Bank Ltd., said “This pick-up in services sector activity could continue over the second quarter and would aid growth in private consumption.”