Manmohan Singh
India's prime minister Dr. Manmohan Singh. REUTERS

The Indian economy outpaced growth expectations in the third quarter to grow more than in the second quarter, boosted by stronger manufacturing growth and construction, according to data released by the government.

The GDP grew 8.9 percent in the July-September quarter, beating expectations of growth of 8.3 percent. The economy had growth 8.8 percent in the previous quarter.

Manufacturing rose 9.8 percent from a year ago, while construction rose 8.8 percent in the quarter. Farm production, helped by good monsoons, rose 4.4 percent.

“The upswing will probably stay strong and slowing inflation will remain the top policy priority,” Vishnu Varathan, an economist at Capital Economics, said in a note.

High inflation rates have been plaguing India for the past several months. Food rate inflation is currently around 10.15 percent for the week ended Nov. 13. Overall inflation fell to 8.58 percent in October, from 8.62 percent the previous month.

The Indian government and the Reserve Bank of India have been trying to stem the sharp rise in inflation. The RBI raised its short-term borrowing and lending rates by 25 basis points in November, the sixth time to do so.

Economists expect further increases in rates during the next few months.

“We continue to anticipate that the repo rate will be lifted by another 25 basis points in March 2011 and then expect another 50 basis points of tightening by the end-2011, which would take the rate to 7 percent,” Varathan said.

He expects GDP to climb 8.8 percent in fiscal 2010-11. The expansion pace will probably slow in the year after, given the tightening of monetary and fiscal policies coming through, but probably, not by much, he said.

Inflation will be down to 4-5 percent but will continue to remain top policy priority, Varathan added.

“This obviously is a challenge already but this task will be made more difficult given that capital inflows will hold at a high level. The good news is that the annual gain in wholesale prices has almost certainly peaked,” he said.