The economic stimulus seems to have worked. The challenge before Indian policymakers in the months ahead is to assess whether the resulting recovery is strong and broad-based enough to push up interest rates and cut the fiscal deficit.

The signals from the latest data on economic growth are mixed. The good news is that the economy expanded 7.9% on an annual basis in the three months to September, far beyond expectations and at its best rate since the slowdown after September 2008. The other bit of good news is that the recovery is getting more broad-based, if you look at the pickup in industrial growth and (on the demand side) strong growth in private consumption and fixed investment.

Illustration: Jayachandran / Mint

Then come the negatives: Too much of the economic growth still comes from government spending, and farm output is almost sure to take a hit in the December quarter, when the full impact of a poor summer crop is felt.

To be sure, the latest data will make it easier for the Reserve Bank of India to start tightening its monetary policy and encourage the government to present a more disciplined budget in February. The central bank now has a case to start tightening liquidity—say, through an increase in the cash reserve ratio—in its December policy and, perhaps, wait for the Union budget before it raises interest rates.

The big question is whether the Indian economy is now strong enough to walk without the crutches provided by the government.

India cannot sustain the current growth rate unless private sector consumption and investment spending pick up soon. Right now, too much depends on government spending, something which cannot continue without sending India into a high-debt trap.

Monday’s numbers show that both private consumption and fixed investment have started recovering, which means the private sector seems to be getting ready to support economic activity again. Yet, government spending grew at an eye-popping annual rate of 26.9%; output of community, personal and social services, a proxy for government revenue spending, almost doubled from 6.8% to 12.7%, as the second instalment of salary arrears was paid to government employees.

The stimulus can be withdrawn without harming growth only if private sector spending picks up further speed in the months ahead.

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