India’s Economy May Grow at Fastest Pace in Year, Survey Shows

Nov. 30 (Bloomberg) -- India’s economy, the third biggest in Asia, probably grew at the fastest pace in a year because of record-low interest rates and tax cuts.

Gross domestic product rose 6.3 percent in the three months ending Sept. 30 from a year earlier, according to the median forecast of 19 economists in a Bloomberg survey. That would compare with 6.1 percent in the previous quarter. The statistics office will announce the number at 11 a.m. local time in New Delhi today.

Officials are weighing the threat from inflation against the risk that raising interest rates too quickly will undermine the recovery of the $1.2 trillion economy. India must withdraw monetary stimulus “carefully and strategically” to sustain growth, central bank Deputy Governor Subir Gokarn said in Mumbai on Nov. 24.

“India’s growth is being heavily driven by government stimulus,” said Nikhilesh Bhattacharyya, a Sydney-based economist at Moody’s Economy.com. “It’s way too soon to turn away from accommodative monetary and fiscal policies.”

To steer the nation through the worst global financial crisis since the 1930s, the central bank has kept the key reverse repurchase rate at 3.25 percent since April and government spending and tax cuts have taken the value of stimulus measures to 12 percent of GDP. That’s helped growth recover from a four-year low in the final quarter of last year and the benchmark Sensitive index on the Bombay Stock Exchange to climb about 70 percent this year.

Monsoon Rains

Inflation pressures are building as growth quickens and after the weakest monsoon rains since 1972 hurt farm output, pushing up food costs. The central bank forecasts inflation of 6.5 percent by March 31 from 1.34 percent in October and 0.5 percent in September. During 2008, the rate rose to as high as almost 13 percent.

“Given the magnitude of easing and the speed at which inflation has bounced back, monetary policy will need to be tightened fairly soon,” the Paris-based Organization for Economic Cooperation and Development said Nov. 19.

Falling bond yields signal that investors don’t expect interest rates to rise this year.

“We see inflation risks emerging and expect interest-rate hikes from January 2010,” said Ramya Suryanarayanan, an economist at DBS Group Holdings Ltd. in Singapore.

Obsessed With Growth?

In a debate in parliament on Nov. 26, Finance Minister Pranab Mukherjee said policy makers are balancing the need to create jobs against inflation concerns. The central bank started tightening monetary policy on Oct. 27 by ordering lenders to keep more money in government bonds.

Food inflation has climbed to 15.58 percent, a politically sensitive issue in a nation where the World Bank estimates that three-quarters of the population live on less than $2 a day. Opposition lawmakers said last week that the government is obsessed with growth, allowing prices to spiral to the detriment of the poor.

By sustaining the second-fastest growth of any major economy, trailing only China, India is drawing investment from companies including French tiremaker Michelin & Cie, which said this month that it will add a factory in the southern state of Tamil Nadu, and South Korea’s Samsung Electronics Co.

Prime Minister Manmohan Singh said this month that returning to the 9 percent growth that India averaged between 2004 and 2008 is “eminently feasible” in the medium term because a high national savings rate will aid investment.

Car sales climbed at a 33.9 percent annual pace in October and cellular operators, led by Tata Teleservices Ltd., added 16.6 million new subscribers. Lodha Developers Ltd., an Indian property company planning an initial share sale, said its home sales may climb about threefold this fiscal year as low interest rates encourage spending.