By Anant Vijay Kala and Eric Bellman
NEW DELHI--India's economy expanded at its fastest pace in more
than two years last quarter as corporate and consumer demand rose
on hope the government and central bank are at last steering Asia's
third-largest economy out of a slowdown.
India's gross domestic product in the three months ended June 30
grew 5.7% from a year earlier, according to data released Friday by
India's Ministry of Statistics and Programme Implementation.
That was a big step up from the 4.6%, on-year expansion in the
previous quarter and the highest growth the country has seen since
the three months ended March 31, 2012.
"India's outlook is brightening," said Bill Adams, a senior
international economist at PNC Financial Services Group.
With everything from car sales and exports to manufacturing and
power production starting to heat up, economists say the Indian
economy may at last be coming out of a painful period of so-called
stagflation.
Friday's data show output of the country's manufacturing sector,
which had been one of the biggest drags on the economy, rose 3.5%
last quarter, rebounding from a 1.2% contraction a year earlier.
Output of electricity and some utilities grew 10.2%. Services such
as community, social and personal services recorded 9.1% expansion
while financing and insurance services rose 10.4%. Farm output also
expanded 3.8%.
Investors, executives and consumers say they are spending again
thanks to growing confidence about the policies from the Reserve
Bank of India as well as the new leaders in New Delhi.
Since taking over one year ago, India's central-bank governor,
Raghuram Rajan, seems to have made the moves necessary to stop the
plunge of the rupee against the dollar and rein in inflation.
Meanwhile, the country's new government, led by Prime Minister
Narendra Modi, is expected to use its rare majority in Parliament
to speed up industrial and infrastructure projects and revamp
regulations to make it easier to do business in India.
"There is a pickup in activity levels in the Indian economy,"
said Rajiv Biswas, an economist at research firm IHS. "Since the
Modi government came in, consumer and business confidence has been
improving."
India has been struggling with slowing growth and rising
inflation rates for more than two years. Its economy grew just 4.7%
in the year ended March 31, marking the first time in 25 years that
GDP expansion has failed to reach 5% for two years in a row.
The country has been experiencing a crisis of confidence as
global interest in emerging markets dwindled and New Delhi seemed
unable to make the decisions needed to invigorate growth,
distracted by a series of corruption scandals.
While it is premature to attribute last quarter's GDP growth to
the policies of the Modi government--which only took office late in
the quarter, in May--economists say even the anticipation of change
was enough to lift the economy. Many optimistic executives think
Mr. Modi will turn out to be India's most business-friendly prime
minister ever.
In the first three months in office, Mr. Modi's government has
already made such changes as opening up India's railways to foreign
investment, allowing more foreign ownership in defense companies
and getting rid of the Planning Commission, a remnant of India's
socialist past.
While inflation has come down thanks to RBI policies, it could
still derail India's comeback, economists warned. If lower than
normal monsoon rains boost food prices or oil prices climb on
troubles in the Middle East then the central bank may be forced to
stomp out the budding growth to control inflation.
"Inflation still is a major concern, otherwise the central bank
would have lowered interest rates by now," said D.K. Pant, chief
economist at India Ratings, a Fitch Group company.
Another spoiler for the party would be if further tapering of
easy-money policies by the U.S. reignite uncertainty about emerging
markets and instability in the Indian currency, he said.
Inflation flare ups and taper tantrum sequels aside, economists
say India needs to be more aggressive about change if it wants to
maintain and gain momentum.
For India to double its growth rate to the close to 10% it needs
to provide more jobs and better lives for its population of 1.2
billion people, Mr. Modi will have to push through the tough
regulatory changes.
His government can start by slashing the country's subsidy bill
to "free up credit in the Indian commercial banking sector to fund
the productive investment that India needs to reach the next level
of economic development," said PNC's Mr. Adams. "To see faster
growth, India will probably need more aggressive and politically
costly market-oriented economic reforms."
Write to Anant Vijay Kala at anant.kala@wsj.com and Eric Bellman
at eric.bellman@wsj.com