India’s economic growth slowed to 6.7% year-on-year in the April-June quarter as a decline in government spending during national elections weighed, data showed on Friday, but it remained the world’s fastest-growing major economy.

The rise in gross domestic product was less than a 6.9% expansion forecast by a Reuters poll, and compared to 7.8% growth in the previous quarter.

Still, it was faster than 4.7% growth in China, Asia’s biggest economy, in April-June, and India’s slowdown is expected to be temporary as economists forecast that easing inflation and a pickup in government spending will shore up growth in the coming months.

V. Anantha Nageswaran, India’s chief economic adviser, said growth momentum remained strong backed up strong investment demand and upbeat business sentiments.

“In the medium term, the Indian economy can grow at a rate of 7% plus on a sustainable basis if we can build on the structural reforms undertaken over the last decade,” he told reporters after the release of data.

Prime Minister Narendra Modi has taken several steps to boost the economy since recent national elections, in which his Bharatiya Janata Party (BJP) failed to win an outright majority and is having to rely on allies to run the government for the first time in a decade.

The Gross Value Added (GVA), seen by economists as a more stable measure of growth, increased by 6.8% in April-June from a year earlier, compared to 6.3% in the previous quarter.

Upasna Bhardwaj, chief economist at Mumbai-based Kotak Mahindra Bank, said the GDP numbers were softer than expectations but the GVA remained firm with non-farm growth holding up.

“We retain our GDP growth expectations of 6.9% in 2024/25, aided largely by rural demand and government spending while watching closely the likely fatigue in urban demand, private capex and pace of global slowdown,” she said.

Consumer spending, which constitutes about 60% of GDP, rose to a seven-quarter high of 7.4% in April-June from a year earlier, compared to 4% in the previous quarter. Capital investments also rose by 7.4% compared to 6.5% in the previous quarter.

However, government spending in real terms fell 0.2% year-on-year in April-June, compared to a 0.9% rise in the previous quarter, data showed.

Manufacturing, which makes up about 17% of India’s GDP, grew by 7% year-on-year in the April-June quarter, compared to an 8.9% expansion in the previous quarter.

Agricultural output rose 2% year on year in the same period, up from 1.1% in the previous quarter. Plentiful rainfall this year is expected to enhance farm output, rural incomes and consumer demand, a trend reflected in increased sales of two-wheelers and tractors in July.

Despite strong growth relative to other economies, India faces challenges in job creation and more inclusive economic growth. These issues have affected real wages, household consumption among lower-income groups, and private investments.

“Government capital expenditure will continue to be a major pillar of growth as in the previous year,” said Suman Chowdhury, economist at Acuite Ratings, citing infrastructure spending.

The government has stepped up spending with last month’s $576 billion annual budget, which includes billions of dollars for affordable housing and rural jobs, to stimulate economic activity.

Economists anticipate that easing retail inflation could lead the central bank to cut its policy rate later this year, potentially boosting household consumption and supporting private investments.

Separately, the Indian equity market closed at an all-time high before the release of the GDP numbers at 5:30 pm on Friday.

At closing, the Sensex was at 82,365, up 231 points or 0.28 per cent and Nifty was at 25,235, up 83 points or 0.33 per cent.

During the trading session, the Sensex and Nifty touched a new all-time high of 82,637 and 25,268 points respectively.

On the Bombay stock Exchange (BSE), 2,239 shares were in the green, 1687 shares were in the red and 119 shares closed without any change.

Among the sectoral indices, Auto, IT, PSU Bank, fin Service, pharma, realty and metal were major gainers while FMCG and media were major laggards.

In the Sensex pack, Bajaj Finance, M&M, NTPC, Bajaj Finserv, Bharti Airtel, Power Grid, Sun Pharma and TCS were the top gainers.

Tata Motors, Reliance, ITC, Tech Mahindra, HDFC Bank, Nestle and Maruti Suzuki were the top losers.

According to experts, “Global markets are currently resonating with the US Fed’s pledges of a rate cut in September. The US and Indian markets have regained recent highs, reflecting the continuation of this optimism. However, the dollar is strengthening given healthy US GDP growth, strong retail sales and expectation that the upcoming US job claims will be steady, leading to shallow rate cuts in the future.”

“Though the domestic market is currently showing a positive bias, the Indian Q1 GDP growth is expected to be moderate, while premium valuation and a lack of fresh triggers could see further momentum buildup in value stocks,” they added.

The Foreign Institutional Investors (FIIs) bought equities worth Rs 3259 crore on August 29, while domestic institutional investors extended their buying as they bought equities worth Rs 2690 crore on the same day.

Rupak De, Senior Technical Analyst of LKP Securities said, “The Nifty traded sideways after a strong start. However, market strength is likely to persist as long as the index stays above 25,000.

“A drop below this level could trigger a significant correction. On the upside, the current optimism could drive the index towards 25,500 in the near term.”

Agencies