India’s Economy Probably Expanded at Slowest Pace in Six Years

May 29 (Bloomberg) -- India’s economy probably grew at the slowest pace in six years last quarter, underscoring the challenge Prime Minister Manmohan Singh faces in his second term.

Asia’s third-largest economy expanded 5 percent in the three months to March 31 after a 5.3 percent gain in the previous quarter, according to the median forecast of 24 economists in a Bloomberg survey. The Central Statistical Organisation will release the data at 11 a.m. today in New Delhi.

Singh made reviving growth his top priority after this month’s resounding re-election and added the task requires more “reform of the economy.” Finance Minister Pranab Mukherjee says he will spend more on roads and ports in July’s budget to help India weather the worst global recession since World War II.

“Reviving growth is vital to make a dent on poverty,” said Shashanka Bhide, chief economist at the New Delhi-based National Council of Applied Economic Research. “Expectations are high from the new government.”

India’s key Sensitive stock index has surged 18 percent since Singh won a clear mandate, on optimism a coalition without communist parties will facilitate plans to sell state assets and allow more foreign investments in insurance and banking.

The sale of stakes in state-run companies such as National Hydroelectric Power Corp. and Oil India Ltd. is vital for Mukherjee to find money to spend without widening a budget deficit that Moody’s Investors Service says has ‘deteriorated.”

Credit Rating

India’s budget shortfall stood at 6 percent of gross domestic product in the year ended March 31, more than double the target. Moody’s has kept India’s local currency long term rating at Ba2, two levels below investment grade while Standard & Poor’s has a BBB- rating on India, the lowest investment grade.

“The unexpected election outcome provides scope for rationalizing spending, pushing ahead with disinvestments and key reforms,” Moody’s said in its annual report yesterday.

For now, Mukherjee said he plans to spend more to stimulate the economy, betting it will help boost tax revenues. He said the election results vindicate the strategy to pursue growth as a tool to improve people’s livelihood. The World Bank estimates three-quarters of Indians live on less than $2 a day.

The 73-year-old Mukherjee returned to the finance ministry after a quarter of a century. As the finance minister in Indira Gandhi’s cabinet from 1982 to 1984, he ran an economy that was almost closed and insulated from the global economy.

Singh, as finance minister between 1991 and 1996, abandoned the Soviet-style state planning and introduced free-market policies that have helped the economy quadruple to $1.2 trillion. Mukherjee said this week he will draft the budget with Singh, renewing a relationship that started in the early 1980s when he appointed Singh as the central bank governor.

‘Game-Changing’

Singh’s election triumph has been a “game-changing” verdict, says Macquarie Group Ltd. economist Rajeev Malik, describing it as a “catalyst in enhancing the evolving global rise of the Indian economy.”

In Singh’s first term between 2004 and 2009, India’s economy grew close to 9 percent on average each year, the fastest pace since independence in 1947, helped by a six-fold surge in foreign direct investments to $38 billion.

General Electric Co. Chief Executive Officer Jeffrey Immelt said yesterday the Indian elections was the best development in the country he’d seen in 20 years and that he was “completely optimistic about India in the long term.”

Foreign Investment

At stake are economic changes blocked by Singh’s erstwhile communist partners such as a bill to raise the foreign investment ceiling for Prudential Plc and other insurers to 49 percent from 26 percent, and other proposed legislation aimed at removing a 10 percent cap on the voting rights of foreign investors in non-state banks. The government also wants to allow global retailers such as Wal-Mart Stores Inc. into India.

Growth may recover from the current quarter ending June 30 as stimulus measures and six interest rate cuts together worth $85 billion, or 7 percent of GDP, begin to filter in the economy, analysts said. The economy may grow 5.2 percent this quarter, according to the median of 10 analysts surveyed by Bloomberg.

Car sales and the production of cement, electricity and refined petroleum are already showing signs of revival. India’s passenger car sales increased 4.2 percent in April from a year earlier, after a 1 percent gain in March. Cement production jumped 10.1 percent in March and electricity output rose 5.9 percent from a year ago, according to government data.

UBS AG raised its growth forecast for India to 6.2 percent in the year ending March 2010, compared with an earlier prediction of 5.2 percent. Standard Chartered economist Anubhuti Sahay said risks to the bank’s 5 percent forecast for the same period were now “to the upside” and Morgan Stanley’s Chetan Ahya raised his estimate to 5.8 percent from 4.4 percent.

The election outcome “is a huge positive surprise and is likely to allow the new government to initiate some long-pending structural reforms,” said Morgan Stanley’s Ahya. “Decisive policy actions will be critical to lift the pace of GDP growth closer to potential.”