India GDP Outpaces China Despite Slowdown to 4.4% Last Quarter

South Asian nation growing at 7% annual clip versus rival's 3%

India's economic growth rate slowed to 4.4% in the third quarter of the current fiscal year, official figures showed on Tuesday (28.02.2023), although the country is zipping ahead of regional rival China.

India's gross domestic product growth for the October-December period matched the Reserve Bank of India's 4.4% year-on-year estimate. Before the data release, 42 economists polled by Reuters had given a median forecast of 4.6%.

The growth rate has been slipping since the revised 13.2% logged for the first fiscal quarter, from April to June. The figure for July to September came in at 6.3%. In the October-December period of the previous year, the South Asian nation's GDP grew 5.2%, according to the latest numbers.

Nevertheless, India remains one of the world's better-performing economies, with the government maintaining its full fiscal year projection of 7%, after an upgraded 9.1% for the previous 2021-2022 fiscal year.

Although India reports official figures only for financial years, a basic calculation of its quarterly results in 2022 shows average growth of 7% for the calendar year as well, far outpacing the 3% China reported.

N.R. Bhanumurthy, vice chancellor of the Bengaluru-based Dr. B.R. Ambedkar School of Economics University, agreed that India did "far better" than China in the calendar year, pointing out that the latter's sharp slowdown appears to have been caused by the "very stringent [COVID-19] lockdown that they had."

"They are also dependent heavily on exports," which also fell, he told Nikkei Asia.

Devendra Kumar Pant, chief economist at India Ratings and Research, explained that "India is more [of] an internal demand story while China is an export-led [economy]."

Pant noted that countries "less integrated" with what happens in the global arena, such as the ongoing war in Ukraine, have not been impacted as much. "India has done better than China, there is no doubt about it," he told Nikkei, saying that countries reliant on external demand have faced "more problems."

Still, India has faced its share of challenges.

The fresh data for October-December shows the manufacturing sector contracted by 1.1%, declining for the second consecutive quarter. The segment shrank 3.6% in the July-September term. Bhanumurthy suggested that "export deceleration [and] supply chain issues which impacted the automobile sector" could be among the causes.

Prices are also a persistent concern, amid aggressive interest rate hikes to try to contain the pressures unleashed by Russia's invasion of Ukraine.

Retail inflation for the month of January rose to a three-month high of 6.52% -- from 5.72% in December -- exceeding the Reserve Bank of India's maximum tolerance level of 6%. This was a setback after recent readings had shown inflation was cooling.

Days before January's inflation figure came out, the RBI had increased its benchmark repo rate -- the rate at which it lends money to commercial banks -- by 25 basis points, or a quarter of a percentage point, to 6.5%. This was the sixth hike in a row since the central bank started increasing the rate in May last year, after leaving it unchanged for two years at 4%.

At the time, many experts predicted the RBI would now pause the rate increases. But the rise in inflation in January has sparked speculation over another possible hike in the next monetary policy review, due in April.

On the bright side, India's agriculture sector grew 3.7% in the third fiscal quarter, improving on the 2.4% growth in the previous three months. Mining also expanded at the same pace, versus a contraction of 0.4% in July-September.

India's economy "continues to perform in key private services and agriculture, while manufacturing remains the only area with visible weakness," Barclays said in a note. It said that mining activity had gained momentum, largely due to increased coal extraction.

The government-run State Bank of India painted an optimistic picture in a research report last week. It said that domestic consumption and investment "stand to benefit from stronger prospects for agricultural and allied activities, strengthening business and consumer confidence, and strong credit growth."

The bank added that "supply responses and cost conditions are poised to improve even though inflation witnessed a rebound in January."

The emphasis on capital expenditures in the next fiscal year's budget, announced in early February, is expected to spur private investment, "strengthen job creation and demand, and raise India's potential growth," the SBI said.