The Indian economy (measured at factor cost) grew at an unexpectedly rapid pace in July-September 2010, expanding by 8.9% year on year. The Central Statistical Office has also revised up real GDP growth in April-June by 0.1 percentage points, to 8.9%. This means that the economy expanded by 8.9% year on year in the first six months of 2010/11-a much faster rate than that of 7.5% in the year-earlier period.

National-accounts data for the second quarter of 2010/11 reveal three main points. First, economic growth was driven by a rapidly expanding services sector: services contributed nearly 6 percentage points to GDP growth. Second, growth in manufacturing activity slowed, to stand at 9.8% year on year, down from 13% in April-June. (Manufacturing contributed about 1.5 percentage points to GDP growth.) Finally, at an annual rate of 4.4% growth in the agricultural sector was twice as fast as in previous quarters and well above its long-term average rate. The strong performance of the farming sector owed much to a low base of comparison, as agricultural production in July-September 2009 was adversely affected by the poorest monsoon rains in nearly four decades.

Data on the expenditure side confirm the surge in economic activity in July-September. Private consumption and government consumption rose by 9.3% and 9.2% respectively. Investment growth also remained strong, at 11.1% year on year, although this was down from 19% in April-June. Overall, real GDP growth on an expenditure basis was 10.6% year on year.

Following the release of these strong national-accounts data for the second quarter of the current fiscal year, the government has revised up its forecast for GDP growth in 2010/11 as a whole. It now believes that the economy could grow by 9% in the fiscal year; this would be the highest rate of growth in three years. But the Ministry of Finance, in the mid-year analysis of the economy that it presented to parliament, also said that average inflation (as measured by the wholesale price index) would be far higher than the target of 5.5% set by the RBI for 2010/11, at 9%. Average food price inflation is forecast by the ministry at 20%. This is a worry for the government, as prices for basic food items are always a major issue with voters.