India's Economy Shows Surprising Growth

India's $1.2 trillion economy may be among the world's first to come roaring out of the global recession, as government data showed it grew by 7.9% in the quarter ended on Sept. 30, the largest growth since the Indian government started releasing the figures in 1996. Industry grew 9.2%, compared with 5.1% in the year-earlier quarter. "These recent figures may well signal that the worst effects of the global financial crisis have passed for the economy," says Anuj Chande, head of the South Asia Group at Grant Thornton, which advises companies doing business in Asia.

The numbers, released on Nov. 30, have economists considering raising their estimates for full-year gross domestic product growth in India; the average estimate is currently about 6.5%. The government, meanwhile, has said it expects the Indian economy to grow by 7% to 8% by the end of the fiscal year in March 2010, and hit 9% the year after. "Our own 6.2% number for the current fiscal year is certainly looking on the low side," says Robert Prior-Wandesforde, Singapore-based Asia economist for HSBC (HBC).

It's an interesting turnaround by the Indian economy, which spent the period from October 2008 to March 2009 on government-sponsored life support—some $80 billion in tax cuts and other benefits in the form of a stimulus. Without the stimulus, growth in those two quarters would have been less than 1%; the stimulus pushed it to 5.8%.

Broad-Based Growth
Since then the Indian stock exchange has more than found its footing—it is up 72% for the year—and Indian companies have taken advantage of the rising market to mop up billions of dollars in share sales, using that money to pay down debt, prop up production, and even consider overseas acquisitions, including a $12 billion bid by Reliance Industries, India's largest private company, for LyondellBasell, a Dutch chemicals manufacturer. "As upside surprises go, this was a big one,"says Prior-Wandesforde. "This was an extraordinary result."

More reassuringly, growth was driven by a wide spectrum of increased economic activity. Trade, hotels, transport, and communication, which make up one-third of the economy, grew by 7.7%. Private consumption grew 5.6%, vs. 1.6% a year earlier, signaling that the famously parsimonious Indian consumer feels more comfortable about his job and is spending more freely. "The broad-based nature of the third quarter's domestically driven improvement is encouraging," says Nikhilesh Bhattacharya, a Sydney-based economist with Moody's Economy.com (MCO). "India may experience a quicker return toward its trend growth rate of around 9% than had earlier been anticipated."

In India, where GDP growth figures are closely watched as part of a race with neighboring China, TV news reports took on a celebratory tone. The stock market, widely expected to plunge because of the news from Dubai on Friday, added 1.71% to the benchmark 30-stock Sensex.

Signs of Weakness
As always, though, there are some signs of weakness. It isn't clear how much of the quarter's growth can be attributed to the stimulus package, which continues unabated. One indicator is that the "community, personal, and social services" sector grew by 12.7%, compared with 6.8% the year before. Both Indian Prime Minister Manmohan Singh and Commerce Minister Anand Sharma have said the stimulus will continue well into next year.

Dubai remains a source of concern, albeit small. The 4.5 million Indians living in the Gulf region sent nearly $30 billion back to their relatives in India—that number could drop significantly if many of them lose their jobs. That's a likely scenario; most of them work in construction projects. Indian exports to the United Arab Emirates could be affected, too—with $17.5 billion of merchandise exports in 2008-09, it is India's second-biggest trade destination after the U.S. Luckily, though, of those exports, much is food, which is unlikely to slow. "Overall, there is likely to be some direct impact of the Dubai debacle on remittances into India, as well as on exports, but in our judgment a fairly small one," says Prior-Wandesforde.


Srivastava reports for BusinessWeek from New Delhi.