India's Economy Picks Up Speed -- Update

India's economic expansion accelerated in the latest quarter, ending a five-quarter slowdown and sparking optimism that the negative effects of recent economic policies may now be behind Asia's third-largest economy.

The country's gross domestic product grew 6.3% in the three months through September compared with a year earlier, the government said Thursday. Economists had predicted 6.4% growth.

Growth had dropped to a three-year low of 5.7% the previous quarter, as consumer demand was hit by Prime Minister Narendra Modi's move last yea r to take close to 90% of currency out of circulation and a confusing rollout of a new nationwide goods and services tax this year.

"It seems the worst is past us," said Sujit Kumar, an economist at Union Bank of India. "Prospects are looking brighter now."

India continued to trail China, the world's fastest-growing major economy, a title the South Asian nation lost three quarters ago. China's economy grew 6.8% last quarter.

While more than 6% growth is still impressive when compared with other big economies, India's ability to lift its growth trajectory even further is crucial to providing jobs to the more than 10 million Indians who enter the workforce every year.

Mr. Modi came into office promising jobs and sweeping policy changes to drive the economy forward. But in recent months, he has been battling criticism his biggest moves to modernize the Indian economy may have ended up hurting it.

Late last year, the government forced Indians to exchange 86% of the rupee notes in circulation to fight corruption and encourage people to use banks. The move crimped demand in the largely cash-powered economy. This year the Modi administration rolled out a unified nationwide GST system to streamline interstate trade. But confusion about the new rates and the complicated procedures to pay them hurt business confidence further.

As growth fell to the lowest since early 2014, politicians and citizens started questioning if the payout for the measures was worth the pain.

Dinesh Tripathi, owner of a Mumbai glass company, said his sales have fallen by more than half this year as the cash crackdown and tax confusion hit the real-estate sector, his main consumer. "Business is very bad," he said.

Mr. Modi has asked citizens to be patient and wait for the expected long-term benefits of the changes. His government unveiled economy-boosting measures including a $100 billion spending plan on roads and highways and a $32 billion capital infusion for struggling state-run banks.

Many want to give the prime minister the benefit of the doubt. A Pew Research Center survey released this month showed Mr. Modi had a record high approval rating in March and strong support for his handling of the economy. Also this month, Moody's Investors Service upgraded India's debt rating for the first time in 13 years, citing its confidence in Mr. Modi's moves.

The next big test for his popularity would be next month's local elections in his home state of Gujarat. If his party loses ground, it could be a sign of public disapproval of his policies.

Economists expect expansion to slow to around 6.8% in the year through March, down from 7.1% last year, adding that next year GDP growth should be 7.5%.

According to Thursday's data, manufacturing output grew 7% from a year earlier, accelerating sharply from a 1.2% expansion in the preceding three months.

Growth in mining activity improved to 5.5% after a 0.7% contraction in the previous quarter. Services activity was strong, with many important segments such as hotels and transport clocking about 10% expansion. Farm output growth slowed to 1.7% from 2.3%.

Still, India has one of the best growth rates in the world. The economies of the U.S., European Union and Japan all expanded less than 3.5% last quarter.

However, economists say Mr. Modi will have to continue to take risks revamping the economy if he wants to achieve the 10% growth India needs to improve the lives of its 1.3 billion citizens.

"Many of us are suffering," said Vinod Dhawan, president of the Apparel Exporters and Manufacturers Association, an industry body. "But the government isn't listening to us."

Write to Anant Vijay Kala at anant.kala@wsj.com

(END) Dow Jones Newswires

November 30, 2017 09:25 ET (14:25 GMT)