India's gross domestic product advanced by 5.5 percent in the second quarter from 5.3 percent in the first quarter of the year and compared with a consensus estimate in a recent Reuters poll of 5.3 percent.
But economists were quick to point out that the figure did not necessarily mean the economy, in dire need of structural reforms, was picking up substantially.
Markets are watching the Reserve Bank of India (RBI) to see whether it will lower interest rates to boost growth but the bank has repeatedly said that reforms by the government should boost GDP and that it needs to fight inflation.
The current GDP figure is unlikely to spur the RBI into action although some analysts say that, with inflationary pressures expected to decrease, the bank may ease monetary policy later.
Agriculture advanced by 2.9 percent in the second quarter compared with the 1.7 percent recorded in the first quarter but Leif Lybecker Eskesen, chief economist for India and ASEAN at HSBC Global Research, said this was due to favorable base effects.
Industrial output edged up by just 0.8 percent compared with the first quarter's 0.7 percent rise, while services grew by 7.4 percent versus 7.5 percent.
The pace of growth in trade, transport and communication fell to just 4 percent compared to the first quarter's 7 percent. Private consumption growth fell to 4 percent from just above 6 percent but government consumption jumped to 9 percent from a little over 4 percent.
EXPORT SLOWDOWN
Indian exports, faced with the global headwinds, slowed to just above 10 percent from the first quarter's 18 percent while imports increased by 7.9 percent from 2 percent.
"Today’s number gives reason to be cautiously optimistic that growth may have bottomed out, barring a further worsening of the debt crisis in Europe," Eskesen wrote in a research note.
He said it was encouraging to see progress in the construction sector – which jumped by 10.9 percent from the first quarter's 4.8 percent advance, partly reflecting "more traction on the implementation of key infrastructure projects previously held up by administrative obstacles."
"Moreover, the firmer momentum in financial services suggest that the liquidity easing measures, more than the rate cuts in our view, helped get credit flowing," Eskesen noted.
Financing and business services increased by 10.8 percent compared with the previous quarter's 10 percent.
However, he noted that the mining sector was still held back by problems related to constraints on coal production, the pace of growth in the manufacturing sector was still "very moderate" because of the global headwinds and the weak investment and the slowing of the private consumption's growth was "also of concern."
"Looking ahead, we expect a gradual recovery in growth assuming some traction on structural reforms and implementation of infrastructure-related projects," Eskesen said.
"Of course, there is a risk that progress on structural reforms could prove slower than expected and that the slowdown in the global economy will be more protracted," he added.
RATE CUT COMING?
For analysts at Barclays Capital, the biggest surprise came from the construction sector's jump to a five-year high.
"To us, this jump appears a bit out of place from the overall economic situation, and even the rise in lead indicators did not suggest such a large move up. We believe there is a risk this figure may get revised lower in coming months," they wrote in a market note.
"While this may be an upside surprise in GDP, the number remains quite weak overall. For instance, growth in last two quarters has slowed to an average of 5.4 percent, which is a far cry from 8.6 percent growth in same period last year," they wrote.
Barclays analysts expect the RBI to be forced to take measures to boost economic growth, mainly because of softening core inflation pressures over the next six months and "the near-zero fiscal spending headroom and hesitant government policy initiatives."
They expect the RBI to cut its repo interest rate by one full percentage point between now and the end of the fiscal year 2012-2013, at the end of March next year.
"The timing of such cuts will depend on the trajectory of headline inflation in the next 3-4 months, which will, in turn, depend on food inflation," the Barclays analysts said.
But Eskesen said that the better-than-expected growth figure was not likely to have changed the central bank's hawkish stance and actually "it may on the margin have added to its reluctance to cut policy rates in the absence of tangible progress on fiscal consolidation and structural reforms."