India's economy grows faster than China, RBI seen holding rates

By Manoj Kumar

NEW DELHI (Reuters) - India's economic growth picked up in the July-September quarter, outpacing China on improving domestic demand and manufacturing activity, which could persuade the country's central bank to keep interest rates unchanged at its Tuesday meeting.

The Reserve Bank of India is expected to keep interest rates steady after a sharper-than-expected 50 basis point cut at its last meeting, as it looks to control price rises ahead of a tighter 2016 inflation target.

Asia's third-largest economy expanded by a 7.4 percent annual rate in the second quarter of the current financial year 2015/16 that ends in March, compared with 7 percent in April-June, the Statistics Ministry said on Monday.

China reported annual growth of 6.9 percent for the three months ended Sept. 30.

A survey of analysts by Reuters had forecast Indian GDP growth of 7.3 percent for the July-September quarter.

Stronger growth would be a boost for Prime Minister Narendra Modi after a defeat in state elections of India's third-most populous state of Bihar. Modi is focusing on reforms to accelerate growth and hopes to convince his opponents to implement a much-delayed national sales tax in 2016.

Analysts say the goods and services tax - which seeks to unify India's 29 states into a single market - could help raise GDP growth to around 8 percent in the next fiscal year.

"The growth trajectory is showing initial signs of a recovery," Morgan Stanley said in a note. "However, the continued weakness in external demand and slowdown in rural consumption spending are holding back the pace of recovery."

The economy is not firing on all cylinders and, in the view of some analysts, growth has been driven more by consumption than investments.

A hike of over 23 percent in income of near 10 million government employees and pensioners from January could further boost consumer spending.

A drought in parts of the country for the second straight year has hurt farm output and rural wages - hitting demand for farm machinery like tractors as well as consumer goods.

Although India's headline growth rates appear flattering, this is partly the result of changed statistical methods that seek to capture more evidence of economic activity. Other barometers such as bank credit growth, jobs and consumer demand paint a less healthy picture, analysts say.

While most emerging economies from Brazil to Russia are struggling amid global headwinds and China's slowdown, India remains a bright spot due to its divergent economy and windfall from a plunge in commodity prices.

Sharp falls in the cost of oil and gold imports are reducing the trade deficit and giving a net boost to economic activity.

(Reporting by Manoj Kumar; Editing by Malini Menon and Sanjeev Miglani)