(Bloomberg) -- India’s economy grew faster than the government’s expectations last year, as demand spurred an expansion in the services sector and cushioned the impact of elevated interest rates. 

Data released Wednesday showed gross domestic product in the year to March 2023 grew 7.2%, higher than the 7% median estimate in a Bloomberg survey as well as the government’s forecast made three months ago. While this is slower than the previous fiscal year’s expansion of 9.1%, India is still recording one of the fastest growth rates among major world economies. Investment and consumption supported growth, the data showed. 

Asia’s third-biggest economy grew 6.1% in January to March, from a year ago, faster than the survey estimate of 5%. While this is an acceleration from the previous quarter, uneven monsoon rains and an emerging global slowdown may put a spanner in the works.

The growth is “far in excess of the overall expectations, driven primarily by a very rich growth” in the farm and services sectors, said Rupa Rege Nitsure, chief economist at L&T Finance. “Going by the high frequency indicators, this slowdown has primarily come from urban rather than rural belts. Improved farm sector conditions will help reduce the adverse impact of El Nino predicted for this year,” she added.

The growth was led by construction sector and trade, hotel and transportation segments. Services as a whole has emerged as a major driver of the economy, comprising more than half of the nation’s GDP. India has been gaining market share in information technology and business consulting work, boosting services activity to the highest in almost 13 years. 

India’s resilient growth could reassure the central bank that its monetary tightening hasn’t taken a big toll on the economy and give it more room to pause for a second straight meeting on June 8. This is an outcome predicted by economists in a Bloomberg survey which sees rates on hold for the rest of the year before RBI starts lowering borrowing costs in 2024.


Reserve Bank of India Governor Shaktikanta Das floated the possibility last week that the previous year’s growth could be more than 7% as data showed momentum in the latest quarter. He warned that the war against inflation isn’t over yet and the current hold on rates was more of a pause than a pivot. 

Inflation slowed to 4.7% in April after staying above the RBI’s target ceiling of 6% for much of the last fiscal year. That’s raising hopes for market watchers that borrowing costs won’t go up from here, supporting consumption and investment before national elections next summer. 

The Finance Ministry’s top economic adviser told Bloomberg last week that strong credit demand and softening crude oil prices could buoy the economy, putting India on course for a 6.5% expansion this fiscal year that started April 1. The International Monetary Fund pegs it even lower at 5.9%, but the prospects are still better than China that is expected to show 5.2% growth in 2023.

There are signs of goods exports slowing but a bigger blow for India could come from inadequate rains for crops such as rice, corn and soybeans, which will slow the rural economy that makes up about half of the nation’s GDP.

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--With assistance from Tomoko Sato and Cynthia Li.

(Updates thoughout)

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