India's economy grows at fastest pace in years.

NEW DELHI--India's economy expanded at its fastest pace in more than two years last quarter as corporate and consumer demand rose on hope the government and central bank are at last steering Asia's third-largest economy out of a slowdown.

India's gross domestic product in the three months ended June 30 grew 5.7% from a year earlier, according to data released Friday by India's Ministry of Statistics and Programme Implementation.

That was a big step up from the 4.6%, on-year expansion in the previous quarter and the highest growth the country has seen since the three months ended March 31, 2012.

"India's outlook is brightening," said Bill Adams, a senior international economist at PNC Financial Services Group.

With everything from car sales and exports to manufacturing and power production starting to heat up, economists say the Indian economy may at last be coming out of a painful period of so-called stagflation.

Friday's data show output of the country's manufacturing sector, which had been one of the biggest drags on the economy, rose 3.5% last quarter, rebounding from a 1.2% contraction a year earlier. Output of electricity and some utilities grew 10.2%. Services such as community, social and personal services recorded 9.1% expansion while financing and insurance services rose 10.4%. Farm output also expanded 3.8%.

Investors, executives and consumers say they are spending again thanks to growing confidence about the policies from the Reserve Bank of India as well as the new leaders in New Delhi.

Since taking over one year ago, India's central-bank governor, Raghuram Rajan, seems to have made the moves necessary to stop the plunge of the rupee against the dollar and rein in inflation.

Meanwhile, the country's new government, led by Prime Minister Narendra Modi, is expected to use its rare majority in Parliament to speed up industrial and infrastructure projects and revamp regulations to make it easier to do business in India.

"There is a pickup in activity levels in the Indian economy," said Rajiv Biswas, an economist at research firm IHS. "Since the Modi government came in, consumer and business confidence has been improving."

India has been struggling with slowing growth and rising inflation rates for more than two years. Its economy grew just 4.7% in the year ended March 31, marking the first time in 25 years that GDP expansion has failed to reach 5% for two years in a row.

The country has been experiencing a crisis of confidence as global interest in emerging markets dwindled and New Delhi seemed unable to make the decisions needed to invigorate growth, distracted by a series of corruption scandals.

While it is premature to attribute last quarter's GDP growth to the policies of the Modi government--which only took office late in the quarter, in May--economists say even the anticipation of change was enough to lift the economy. Many optimistic executives think Mr. Modi will turn out to be India's most business-friendly prime minister ever.

In the first three months in office, Mr. Modi's government has already made such changes as opening up India's railways to foreign investment, allowing more foreign ownership in defense companies and getting rid of the Planning Commission, a remnant of India's socialist past.

While inflation has come down thanks to RBI policies, it could still derail India's comeback, economists warned. If lower than normal monsoon rains boost food prices or oil prices climb on troubles in the Middle East then the central bank may be forced to stomp out the budding growth to control inflation.

"Inflation still is a major concern, otherwise the central bank would have lowered interest rates by now," said D.K. Pant, chief economist at India Ratings, a Fitch Group company.

Another spoiler for the party would be if further tapering of easy-money policies by the U.S. reignite uncertainty about emerging markets and instability in the Indian currency, he said.

Inflation flare ups and taper tantrum sequels aside, economists say India needs to be more aggressive about change if it wants to maintain and gain momentum.

For India to double its growth rate to the close to 10% it needs to provide more jobs and better lives for its population of 1.2 billion people, Mr. Modi will have to push through the tough regulatory changes.

His government can start by slashing the country's subsidy bill to "free up credit in the Indian commercial banking sector to fund the productive investment that India needs to reach the next level of economic development," said PNC's Mr. Adams. "To see faster growth, India will probably need more aggressive and politically costly market-oriented economic reforms."

Source : marketwatch.com