Sharp rise in India's growth rate

Investment in India has been strong in recent times

The Indian economy grew faster than expected in the first part of 2005 on the back of a sharp rise in industrial exports and buoyant domestic demand.

India's economy grew 8.1% in the three months to June, well ahead of the 7% rise seen in the previous quarter.

Rapid growth in manufacturing and business services, such as outsourcing, offset lacklustre growth in farming.

India's huge industrial capacity and growing affluence have made it one of the world's fastest-growing economies.

Product demand

Growth in the first quarter of the year was driven by the manufacturing sector, which expanded by more than 11% on an annualised basis.

We expect India's growth to remain on track for a superior, sustainable expansion Bhavna Jaisingh, Yes Bank

Businesses were able to withstand the impact of higher energy costs, thanks to booming demand for products and infrastructure in India.

Economists believe the manufacturing sector has cooled over the summer months, because of supply disruptions and the general slowdown in the global economy.

However, they think continued strength in business services and a pick-up in the agriculture sector will help to sustain overall growth.

Monsoon relief

Farm sector output rose just 2% in the past three months, because of uneven crop production, but monsoon rains forecast for the next couple of months are expected to boost output.

The latest figures have prompted several economists to revise upwards their full-year growth prognoses.

Most are anticipating growth of between 7% and 7.5%, although at least one said growth of above 8% was not out of the question.

The arrival of monsoon rains could help boost crop production

The government of Manmohan Singh is predicting 7% growth this year, which would represent a modest increase on last year's 6.9% figure.

However, the pace of growth may be affected by growing industrial unrest over the government's planned economic reforms.

Millions of workers staged walkouts on Thursday in protest at plans to privatise state assets, in the first national strike for 18 months.

Nevertheless, experts remain optimistic about growth prospects.

"Going forward, we expect India's growth to remain on track for a superior, sustainable expansion," Bhavna Jaisingh, chief economist at Mumbai-based Yes Bank.

"Industry and services will continue to boost growth, while agriculture is likely to remain a wild card."

Outsourcing

The growth in outsourcing - which has seen a host of European and US companies transfer call handling, IT and data functions to Indian partners - shows little sign of slowing down, despite stiffer competition from other low-cost Asian markets.

"The financial services industry and business process outsourcing are growing fantastically well," said Haseeb Drabu, chairman of Jammu and Kashmir Bank.

"As these sectors still have a long way to go before they can reach their potential, there is scope for the economy to grow rapidly without inflationary pressures building up strongly."