India’s Economy Probably Grew Fastest Since 2007 (Update1)

India’s Economy Probably Grew Fastest Since 2007 (Update1)

By Kartik Goyal

May 28 (Bloomberg) — India’s economy probably grew at the quickest pace in more than two years, increasing pressure on the central bank to raise interest rates even as Europe’s sovereign- debt crunch threatens to undermine the global recovery.

Gross domestic product rose 8.6 percent in the three months ended March 31 from a year earlier, the most since the December quarter of 2007, according to the median of 19 forecasts in a Bloomberg News survey. The Central Statistical Organisation is due to announce the data on May 31 at 11 a.m. in New Delhi.

India and China, the world’s fastest-growing major economies, face the threat of the debt crisis cutting demand in the European Union, the market accounting for a fifth of their exports. India’s central bank said last week that it will raise rates only cautiously even though they are “out of line” with inflation, running close to 10 percent.

“The Reserve Bank of India is likely to follow a measured approach as global factors contaminate the issues relating to monetary policy,” said Sailesh K. Jha, Singapore-based managing director for fixed-income strategy and sales at Jefferies & Co., a New York-based brokerage. “Inflation may further broaden.”

India’s benchmark Sensitive Index rose 0.6 percent to 16,769.89 at 10:30 a.m. on the Bombay Stock Exchange. The yield on the 10-year government bond gained 6 basis points to 7.58 percent in Mumbai.

Rupee Declines

The rupee advanced 1.4 percent against the U.S. dollar in Mumbai today. Even so, it has declined 4.9 percent this month, making imports costlier 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, while the wholesale-price inflation touched 9.59 percent in April.

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.

The economy grew 6 percent in the quarter ended Dec. 31.

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.

In comparison, China’s $4.3 trillion economy grew 11.9 percent in the first quarter. 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.

Infrastructure Impact

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.

“Unless infrastructure is addressed in a serious way in India, it will remain a drag on growth and inflation,” said N.R. Bhanumurthy, an economist at the New Delhi-based National Institute of Public Finance and Policy.

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

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.

Bhanumurthy said companies’ costs rise as they invest in their own power generators to meet a shortage in supplies. 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.

“The key thing required in India, is a significant pick-up in infrastructure investments,” said Vetri Subramaniam, head of equity funds at Mumbai-based Religare Asset Management Co., which manages about $3 billion in assets.

To contact the reporter on this story: Kartik Goyal in New Delhi at

Last Updated: May 28, 2010 01:26 EDT

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