World Business

Indian economic growth returns to the fast lane

By Kartik Goyal (China Daily)
Updated: 2010-05-29 09:39

Pressure mounts on central bank to hike interest rates

NEW DELHI - 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 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 am on the Bombay Stock Exchange. The yield on the 10-year government bond gained 6 basis points to 7.58 percent in Mumbai.

The rupee advanced 1.4 percent against the US dollar in Mumbai on Friday. 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.

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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 on 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.

Bloomberg News