India's GDP Growth Holds at Slowest Pace Since 2005

India's economic growth held at the weakest pace since 2005 as the highest interest rates in six years discouraged consumer spending and investment.
Asia's third-largest economy expanded 8.8 percent in the three months to March 31 from a year earlier, matching the revised gain of the previous quarter, the statistics office said in a statement in New Delhi today.
Finance Minister Palaniappan Chidambaram today urged policy makers to ensure they don't damp economic growth as they try to slow inflation, which has doubled in the past four months to 8.1 percent. India's central bank has twice forced lenders to set aside more reserves in 2008, after raising its key interest rate seven times in the past 2 1/2 years to 7.75 percent.
``The dilemma between rising inflation and slowing growth will continue and we expect the central bank to tighten monetary policy,'' said Sonal Varma, a Mumbai-based economist at Lehman Brothers LLC. ``The growth momentum is slowing.''
Lehman cut India's growth forecast to 7.3 percent for this year from 7.6 percent.
The Sensitive index, which has declined 20 percent this year, rose 0.8 percent to 16452.90. The benchmark 10-year government bond fell, pushing the yield close to a one-month of 8.11 percent. The rupee climbed to the highest in more than two weeks, gaining 0.7 percent to 42.49 a dollar.
India's economy expanded 9 percent in the year ended March 31, the least since 2005, today's report said. Growth may slow further to about 8.5 percent in the current financial year, Chidambaram told reporters in New Delhi today.
Manufacturing Slows
Manufacturing growth almost halved to 5.8 percent in the three months to March 31, while farm production slowed to 2.9 percent. Growth is holding up as construction gained 12.6 percent, the fastest pace in almost two years, as the government stepped up efforts to build new airports, roads and power plants.
Still, India is unwilling to risk higher inflation ahead of national elections due by May 2009, analysts said. Prime Minister Manmohan Singh's Congress party has already lost ground in nine of 11 provincial polls held since January 2007 as rising prices of rice, lentils and other staples hurt the 52 percent of India's 1.1 billion people who live on less than $2 a day.
Growth is important to reduce poverty in India, said Sanjay Peters, an economics professor at ESADE Business School in Barcelona. Reining in inflation at the cost of growth is an ``unviable justification,'' he added.
Overseas Borrowings
``We must ensure that the instrument of interest rates moderate inflation and at the same time does not dampen growth,'' Chidambaram said today. ``We have to ensure industrial growth does not slacken.''
To boost growth, the finance ministry yesterday raised the limit on overseas borrowing by companies for domestic spending. Infrastructure companies can borrow as much as $100 million overseas, up from a previous limit of $20 million, while other companies can borrow as much as $50 million, compared with an earlier cap of $20 million.
India's expansion, to be sure, is still the second-fastest after China among the world's major economies, spurred by rising incomes. The South Asian country is growing at more than three times the pace of the U.S. and the nations sharing the euro.
The Reserve Bank of India, whose priority is to keep prices in check, has increased the cash reserve ratio, or the proportion of deposits lenders must set aside, seven times since December 2006 to slow money supply and cool inflation.
`All Options'
That's yet to put a dent in India's inflation rate, which is now the highest in more than 3 1/2 years. The Federation of Indian Chambers of Commerce and Industry say relying on monetary tools isn't the correct way to tackle inflation, which is ``largely driven by supply-side factors.''
Inflation may accelerate further as Oil Minister Murli Deora yesterday said the government will consider ``all options,'' including an increase in fuel prices, to cut losses at state-run refiners that have risen to more than $1 billion a week as crude oil costs soar.
``It is supply shortage that is aggravating inflation in the case of food products, and the inflationary pressure in the case of manufactured products is the result of continuous cost buildups of raw materials and oil products,'' the trade body said in a report on May 24. ``Rising interest rates, besides curtailing demand, are also adding to the cost of companies.''
Cars, Motorcycles
Tata Motors Ltd.'s profit in the year ended March 31 gained at the slowest pace in at least five years as steel and other input costs increased and consumer demand diminished. Bajaj Auto Ltd., India's second-biggest motorcycle maker, expects sales to remain sluggish this year. Industry accounts for a quarter of India's $912 billion economy.
``The year ahead is a challenging year,'' said C. Ramakrishnan, chief financial officer at Tata Motors, the Indian automaker that's buying Ford Motor Co.'s Jaguar and Land Rover units. ``High interest rates, raw material costs and credit availability continue to be challenges.''
As industry slows, demand for services such as travel and banking, which make up 55 percent of the economy, may also wane. Airbus SAS, the world's largest planemaker, said this week that India is among the weakest airliner markets right now and the country's carriers may cancel or delay plane orders in the next 12 months.