Moderate Recovery Is Forecast for India

MUMBAI, India — India’s economy is showing signs of a gradual recovery as gross domestic product increased at an annual rate of 4.8 percent in the three months that ended in September.

The growth surpassed the expectations of Reuters analysts, who projected a 4.6 percent rate, and was faster than the 4.4 percent pace seen in the previous quarter, which was the slowest growth in four years.

“The Indian economy has bottomed out on growth, and I think we are definitely seeing signs of a mild, moderate recovery — not just the gross domestic product numbers but in the results of individual companies,” said Saugata Bhattacharya, chief economist at Axis Bank. “However, in order to resuscitate growth, the government must improve investment channels, take measures towards fiscal consolidation, decontrol diesel prices and simplify the tax structure.”

The pickup in the September quarter was driven primarily by a good monsoon, which helped the agriculture sector expand at a 4.6 percent annual rate, according to the government figures released Friday. The sector that includes finance, insurance, real estate and business services also performed well, increasing by 10 percent; the sector for electricity, gas and water, increased 7.7 percent; and construction, 4.3 percent.

Industrial output, which rose 2 percent in the quarter from a year earlier, is also seen as one of the chief reasons for the improvement in the broader economy. A recovery in global demand and the depreciation of the rupee have helped Indian exports, which rose 13.5 percent to $27.27 billion in October.

“Strong export performance during the quarter has to a large extent aided in the pickup in demand-side G.D.P. growth,” said Bhupali Gursale, an economist at Angel Broking, a Mumbai brokerage firm. “We continue to believe that real G.D.P. growth during financial year 2014 as a whole is likely to range between 4.5 to 5 percent owing to near-term challenges in the macro environment, mainly from subdued domestic demand, fiscal constraints and the muted investment outlook.” India’s 2014 financial year begins in April.

Still, India faces significant challenges as it looks to revive its growth.

Hindered by an uncertain policy environment, subdued investor sentiment, red tape and inadequate infrastructure, the economy has decelerated from a high of 9 percent growth in 2010 to 5 percent growth in the fiscal year that ended last March. Although the central government has announced several policies since September that have eased the restrictions on foreign investment in India, they have yet to translate into real economic growth. Since July, a committee initiated by Prime Minister Manmohan Singh has removed the regulatory bottlenecks for $57 billion worth of infrastructure projects, but a majority of these projects have yet to get off the ground.

Difficulties also persist in certain segments of the economy, like the service sector, which makes up 80 percent of the Indian economy. And rising inflation remains a chief concern for Raghuram Rajan, the governor of India’s central bank, who has increased interest rates twice since he took office in September to battle price pressures. In October, wholesale inflation, the most closely watched price gauge in India, climbed to 7 percent, while consumer inflation hit 10 percent.

“The appointment of a new central bank governor in September has helped to stabilize the currency and financial markets, although this is unlikely to have had much of an impact on real economic activity,” wrote economists at Moody’s Analytics in a report last Monday.

Analysts do not foresee India’s return to high growth numbers in the short term.

“We don’t expect a serious uptick in growth in the near future as there are a lot of supply chain difficulties that have to be addressed, and monetary policy continues to remain quite tight because of severe inflation,” said Miguel Chanco, an economist who covers Asia at Capital Economics, a macroeconomic research company based in Singapore. “Growth is expected to pick up over the next few years, but very gradually, but we don’t think that growth will pick up back to its historical 8 percent growth rate any time soon.”

He added that he thought investor appetite would remain subdued until after the national elections next year. Investors, he said, are unsure whether Mr. Singh’s government will push through any politically unpopular decisions to reduce the deficit in the meantime.