World Business

India's economy grows 8.6%, adding pressure on rates

(Agencies)
Updated: 2010-05-31 16:37

India's economic growth accelerated, adding pressure on the central bank to raise interest rates even as Europe's sovereign-debt crunch threatens the global recovery.

Gross domestic product rose 8.6 percent in the three months ended March 31 from a year earlier after a revised 6.5 percent gain in the previous quarter, the statistics office said in a statement in New Delhi today. That matched the median estimate in a Bloomberg News survey of 22 economists.

India and China, the world's fastest-growing major economies, are weighing the risk of Europe's debt crisis reducing demand in the market that accounts for a fifth of their exports. For India, the room to pause on monetary tightening is limited because its benchmark inflation rate is more than three times that in China.

"Demand-side pressures are building up, which is a worrying sign for inflation," said Vishnu Varathan, a regional economist at Forecast Singapore Pte. "It will be difficult for the Reserve Bank of India to retract itself from normalizing interest rates."

India's central bank said May 19 that it will raise rates only cautiously even though they are "out of line" with the key wholesale-price inflation rate, running at 9.59 percent. In comparison, China's $4.3 trillion economy expanded 11.9 percent in the first quarter and consumer prices rose 2.8 percent in April from a year earlier.

Stocks gain

India's Sensitive Index gained 0.2 percent to 16,900.53 at 12:05 p.m. on the Bombay Stock Exchange. The yield on the 10- year government bond advanced 2 basis points to 7.52 percent from before the report.

The rupee was little changed, maintaining its 4.5 percent drop against the US dollar this month, boosting import costs and impeding central bank Governor Duvvuri Subbarao's efforts to cool inflation.

The Reserve Bank's benchmark reverse repurchase rate is at 3.75 percent after two quarter percentage point increases since mid-March.

Manufacturing rose 16.3 percent in the three months through March from a year earlier, compared with a 13.8 percent gain in the previous quarter, today's report showed. Farm output rose 0.7 percent from a contraction of 1.8 percent and mining grew 14 percent.

‘Source of Strength'

European Central Bank President Jean-Claude Trichet said today that emerging nations have weathered the global recession better and are a "source of strength" for the world economy. GDP in the euro region rose 0.5 percent in the first quarter from a year earlier, according to the European Union's statistics office.

Growth in India's $1.2 trillion economy, Asia's largest after Japan and China, is accelerating as rising incomes boost demand for cars, mobile phones and air travel. Salaries in India may increase at the fastest pace in the Asia Pacific in 2010, according to Hewitt Associates Inc, the Lincolnshire, Illinois- based human resources adviser.

Car sales by companies including Maruti Suzuki India Ltd and Tata Motors Ltd rose 39.5 percent in April from a year earlier, the biggest jump for the month since 1999, according to the Society of Indian Automobile Manufacturers.

3G Auction

The government's auction of high-speed wireless licenses this month highlights corporate enthusiasm for the nation's prospects. Companies including Newbury, England-based Vodafone Group Plc, the world's biggest mobile-phone operator by sales, took part and the sale raised 677.2 billion rupees ($14.3 billion), almost double the amount budgeted by Finance Minister Pranab Mukherjee.

Services including air travel, which account for about 55 percent of India's economy, expanded the most in 21 months in April, according to the Purchasing Managers' Index released by HSBC Holdings Plc and Markit Economics.

The Organization for Economic Cooperation and Development said May 26 that China and India need "a much stronger tightening of monetary policy" to counter inflation and reduce the risk of asset bubbles.

Some economists say Indian Prime Minister Manmohan Singh's government has made slow progress in creating new capacity in infrastructure such as power, roads and ports, which is adding to inflation pressures and limiting economic expansion.

Infrastructure Woes

"The shortage of infrastructure has an adverse impact on growth and it increases the cost of operations for companies," said Shashanka Bhide, chief economist at the New Delhi-based National Council of Applied Economic Research.

The finance ministry estimates that India produces about 10 percent less electricity than it needs, and roads, which account for 65 percent of the nation's cargo, are plagued by single lanes and irregular surfaces.

Related readings:  China, India agree to cement political, economic ties  More Chinese automobile investment to come to India

India, ranked below war-ravaged Ivory Coast and Sri Lanka for the quality of infrastructure, in March lowered its target for spending on roads and ports, after failing to complete planned projects.

Projected investment in electricity, roads and wharves may reach 407 billion rupees in the five years to March 2012, half the original goal, according to the Planning Commission, a government office that sets investment targets.

Singh wants to boost growth to a 10 percent pace, which he says is needed to pull the 828 million people living on less than $2 a day out of poverty.