NEW DELHI (Reuters) - The Indian economy grew 7.7 percent year-on-year in January-March, its quickest pace in nearly two years driven by higher growth in manufacturing, the farm sector and construction.

File Photo - An employee works inside an undergarment factory in Kolkata, India, February 1, 2017. REUTERS/Rupak De Chowdhuri/File Photo

The figure surpassed China’s growth rate of 6.8 percent in the January-March quarter, confirming India as the fastest growing major economy.

For the fiscal year that ended March 31, the Ministry of Statistics reported growth of 6.7 percent, down from 7.1 percent for a year earlier. However, economists expect growth to be robust in the current financial year.

“Investment activity has picked up,” Economic Affairs Secretary Subhash Chandra Garg told reporters, adding that the government expected a further acceleration in the coming year.

India also reported 4.7 percent growth in annual infrastructure output in April, signalling a recovery after it slipped to a three-year low of 4.2 percent in 2017/18.

Construction activity jumped to 11.5 percent during January-March, after a 3.9 percent drop in the year-ago period. Analysts said this reflected the fading impact of the government’s move to scrap high-value bank notes that disrupted supply chains and caused job losses.

The data may offer a boost to Prime Minister Narendra Modi, who is set to seek a second term next year. His government launched a nationwide goods and services tax (GST) but its introduction was botched, nearly scuttling India’s growth prospects in the near term.

“(It) seems like we have moved beyond the teething troubles related to GST implementation,” said Tushar Arora, a senior economist at HDFC Bank. “The pick-up in investment activity is also a good sign.”

The faster pace of growth in the latest quarter might also strengthen expectations of an interest rate increase by the Indian central bank when it reviews monetary policy next week.

About 40 percent of economists polled by Reuters expected a rate rise next week, driven by higher inflation at 4.58 percent in April, above the Reserve Bank of India’s target of 4 percent for the sixth month in a row.

Growth in Asia’s third-largest economy, reported by the ministry, trumped forecasts in a Reuters poll of annual growth at 7.3 percent.

The ministry revised the October-December annual growth down to 7.0 percent from the provisional 7.2 percent it reported earlier.

DOWNSIDE RISKS

India’s recovery could be threatened by higher global crude oil prices, which this month hit $80 a barrel, their highest since 2014.

India meets 80 percent of its oil needs from imports.

Higher oil prices have already pressured the rupee, near a record low last week and Asia’s worst performer.

Alongside, rising global trade tensions due to the imposition of import tariffs by the United States could moderate global trade growth, tempering Indian exports, analysts said.

“We have cut our FY19 GDP forecast by 20 basis points taking into account rising oil prices and potential global trade wars,” said Teresa John, economist, Nirmal Bang Institutional Equities in Mumbai.

However, growth is likely to get a boost from monsoon rains, which hit the southern state of Kerala a few days earlier than normal, potentially brightening the outlook for agricultural output.

Monsoons deliver about 70 percent of India’s annual rainfall and are the lifeblood of its $2.5 trillion economy, spurring farm output and boosting rural spending. The International Monetary Fund expects economic growth could reach 7.4 percent in 2018/19.