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.

Consumer Sentiment and Factory Data Point to Moderate Growth

While other data on Friday showed wholesale prices jumped in May as gasoline and food prices rebounded, underlying inflation pressures were muted.

The reports come ahead of a Federal Reserve meeting next week where policymakers will discuss whether and when to start scaling back their $85 billion a month pace of bond buying.

Though the economy is showing resilience in the face of tighter fiscal policy in Washington, the pace of growth is unspectacular and inflation is well below the central bank's 2 percent target.

"The Fed is likely to maintain its current pace of securities purchases until later in the fall. There is no sign of inflation and growth is still moderate," said Gus Faucher, senior economist at PNC Financial Services Group in Pittsburgh.

The Thomson Reuters/University of Michigan's preliminary index on consumer sentiment fell to 82.7 in June after touching a near six-year high of 84.5 in May.

June's reading was the second highest in the last eight months, suggesting Americans were far from gloomy about their long-term prospects.

"The proximity of the headline index to cycle highs continues to suggest that consumer attitudes remain positive, a likely positive factor for future consumer spending," said Gennadiy Goldberg, an economist at TD Securities in New York.

DOMESTIC DEMAND HELPING FACTORIES

While households appear to be weathering tighter fiscal policy, helped in part by rising home prices, the factory sector has taken a beating from spending cuts. It has also suffered from a recession in Europe that is weighing on global growth.

In a separate report, the Fed said factory output edged up 0.1 percent last month after two back-to-back declines. Overall industrial production was unchanged, held back by a big drop in utilities output.

"The slight improvement in May suggests improving domestic demand is helping offset the negative impact on exports of recent softening in overseas demand," said Ted Wieseman, an economist at Morgan Stanley in New York.

Separately, the Labor Department said the producer price index, a gauge of prices received by the nation's farms, factories and refineries, rose 0.5 percent in May after declining 0.7 percent in April.

Excluding volatile food and energy costs, however, wholesale ticked up only 0.1 percent for a second straight month.

In the 12 months through May, this so-called core PPI advanced 1.7 percent, the same as in April and March. The overall PPI was also up 1.7 percent after rising 0.6 percent in the period through April.

U.S. financial markets were little moved by the reports, with attention shifting to the Fed's meeting on Tuesday and Wednesday. Stocks on Wall Street were trading lower, while prices for U.S. government debt rose. The dollar was little changed against a basket of currencies.

Wholesale gasoline prices increased 1.5 percent last after dropping 6.0 percent in April, boosting energy prices. Energy prices accounted for more than 60 percent of the rise in PPI last month.

A record jump in egg prices pushed up food prices by 0.6 percent. The cost of food had dropped 0.8 percent in April. Egg prices accounted for 60 percent of the rise in the wholesale food index last month.

An increase in light truck prices accounted for almost two-thirds of the rise in core PPI in May.

"Producers are complaining that they have been unable to pass any increases in energy or food prices along to consumers," said Diane Swonk, chief economist at Mesirow Financial in Chicago. "The result is an inflation rate that falls short of a healthy buffer zone for the overall economy."

(Reporting by Lucia Mutikani, Additional reporting by Paige Gance in Washington and Leah Schnurr in New York; Editing by Andrea Ricci, Tim Ahmann and Chizu Nomiyama)