India's 7.4% GDP Growth Rate Keeps It Ahead of the Emerging Economy Pack

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It’s not a great time for major emerging economies right now, but India remains a bright spot. The latest economic data out of India shows that annual economic growth actually accelerated to 7.4 percent over the last quarter, up from 7.0 percent in the previous quarter. The 7.4 rate is not unsurprising, however–it is within the expected range of 7.0 to 7.5 set by the Reserve Bank of India.

The GDP growth rate means that India comfortably retains its position as the world’s fastest-growing major economy. The uptick is partly due to an increase in domestic demand. Curiously, Indian manufacturing sector activity fell to its lowest level in 25 months in November 2015, suggesting that the increase in GDP growth is largely independent of the manufacturing sector.

By any measure, the GDP numbers will be welcome news for Indian Prime Minister Narendra Modi and the Bharatiya Janata Party. Eighteen months into his term as prime minister, Modi has been criticized by his traditional critics and supporters alike for slacking on rapid economic reform. His government has pursued major changes, particularly in terms of foreign direct investment allowances in various sectors and by passing a bold fiscal year 2016 budget. At the same time, the Indian economy has benefited from a windfall due to falling commodity prices.

Politically, the positive growth data should be a reminder for the Bharatiya Janata Party and the Modi government to focus on the agenda that originally helped propel them to victory in May 2014. This is particularly pertinent given the Party’s poor performance in the recent state legislative assembly elections in Bihar, which commentators have attributed in part to an electoral strategy that emphasized divisive language over promising economic dividends.

Outside India, foreign investors have long taken notice of India’s promise amid poorly performing major emerging economies. Notably, India’s growth rate is outpacing China, which posted a growth rate of 6.9 percent for its latest quarter (a number that has come under external scrutiny over accuracy concerns). Similarly, India is outperforming Russia, Brazil, and South Africa, the three other members of the BRICS, along with China.

Going forward, there are several issues that could make a difference for the Indian economy. Specifically, one of the most-watched topics going into 2016 will be the ability of the Modi government to pass a controversial Goods and Services Tax (GST), which would simplify public revenue collection. Recently, reports have suggested that the government is willing to compromise with the Congress-led opposition on certain provisions in the GST.

External factors, such as the U.S. Federal Reserve raising rates, could negatively affect investment inflows into India and temporarily slow down growth. Additionally, the government will look to boost sagging manufacturing activity and agricultural output going forward.

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