India's economy grew 7.9 percent in the July-September period, the fastest pace in six quarters, bolstered by government stimulus measures and rising industrial production, figures showed Monday.
The upsurge suggests that Asia's third largest economy could be emerging faster from the global slowdown than many expected, despite agriculture being hit by drought. The upswing is likely to encourage the central bank to proceed with gradual monetary tightening.
Economists had expected the economy to grow 6.3 percent from a year earlier after growth of 6.1 percent in the April-June quarter. The benchmark Sensex index was up 1.6 percent in mid-afternoon trade, to 16,901.8 points.
During the July-September quarter last year growth was 7.7 percent. Growth for the fiscal year ending March 31 skidded to 6.7 percent, its worst since 2003. From 2003-2008, India's economic growth averaged 8.8 percent a year.
Strong industrial production, rising private consumption and government stimulus drove growth during the September quarter, data from the government's Central Statistical Organization showed Monday.
Mining and quarrying activities expanded 9.5 percent for the quarter from the same period a year earlier. Manufacturing was up 9.2 percent.
Private consumption increased by 5.6 percent from the year-ago quarter in constant currency terms, and government spending rose 26.9 percent in constant currency.
Clouding the horizon was poor agricultural performance. The government said growth in agriculture, forestry and fishing was just 0.9 percent for the quarter.
India suffered its worst summer monsoon since 1972, which has fueled double-digit food price inflation and cut into output.
The government estimated that production of rice, coarse cereals and oil seeds will fall between 14.8 percent and 19.7 percent this season — declines largely not reflected in this quarter's GDP numbers.
While less than 20 percent of GDP comes from agriculture, some 65 percent of the population relies on farming for their livelihood. That means there could be knock-on effects on rural consumption from poor farm output.
Some cautioned that the surge may be more a symptom of unsustainable government spending than an underlying recovery.
"We don't think these numbers are sustainable," said Enam Securities economist Sachchidanand Shukla.
The government handed out 60 percent of promised pay arrears to its employees in September, manufacturing performance was helped by sluggishness this time last year and agricultural growth is likely to turn negative next quarter as the full impact of the poor monsoon makes itself felt, he said.
The economy has rebounded best in pockets helped by tax cuts and stimulus spending, like autos and consumer durables, he said.
"We still think growth remains weak and is not broad-based," he said, adding that he doesn't expect the central bank to hike rates for another 3 to 4 months.
Since September 2008, the bank has infused India's trillion dollar economy with more than 5.85 trillion rupees ($125.5 billion) in actual or potential liquidity.
Top government adviser Montek Singh Ahluwalia told reporters the government may increase its GDP estimate for the year from the current 6.5 percent because of the stronger-than-expected quarterly growth.
"It is difficult to project what will happen in the rest of the year. But this performance does suggest that there may well have to be an upward revision," he said.
Associated Press Writer Ashok Sharma in New Delhi contributed to this report.