India Economy Expands at Fastest Pace in Six Quarters

Nov. 30 (Bloomberg) -- India’s economy expanded 7.9 percent last quarter, the fastest pace in 1 1/2 years, giving the central bank room to withdraw more stimulus to check inflation.

Gross domestic product expanded 7.9 percent in the three months to Sept. 30 from a year earlier as manufacturing jumped 9.2 percent, the statistics bureau said in New Delhi today. That was more than all estimates in a Bloomberg News survey of 22 economists, where the median forecast was a 6.3 percent gain.

Indian shares and the rupee extended gains while bond yields rose following the GDP report, which came after Reserve Bank of India Governor Duvvuri Subbarao last week said there was a need to remove some of the “unconventional” steps implemented to support growth. Economies across Asia including Taiwan, South Korea and Singapore are performing better than expected as the region leads the world out of recession.

“India’s GDP growth is positioning for an upswing,” said Rajeev Malik, a Singapore-based regional economist at Macquarie Group Ltd. “A handle-with-care exit is on the cards.”

To steer India’s $1.2 trillion economy through the worst global financial crisis since the 1930s, Governor Subbarao has kept the central bank’s key reverse repurchase rate at a record- low 3.25 percent since April. Government spending and tax cuts took the value of stimulus measures to 12 percent of GDP.

Stocks Gain

That’s helped the economy recover and the benchmark Sensitive index on the Bombay Stock Exchange to climb about 72 percent this year. The Sensitive index increased 1.9 percent to 16,941.25 at 11:03 a.m. in Mumbai, while the yield on the benchmark 10-year government bond rose to 7.23 percent from 7.21 percent. The rupee gained to 46.45 per dollar from 46.51 before the report.

Inflation pressures are building as economic 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 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.

‘Inflation Risks’

“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.

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 to withdraw monetary stimulus on Oct. 27 by ordering lenders to keep more money in government bonds.

Food inflation, which has climbed to 15.58 percent, is 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 South Korea’s Samsung Electronics Co. and French tiremaker Michelin & Cie, which said this month that it will add a factory in the southern state of Tamil Nadu.

High Savings

Prime Minister Manmohan Singh said this month that returning to the 9 percent growth pace 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.

Rolls-Royce Motor Cars Ltd., which introduced the super- luxury “Ghost” model in India this month, said it has already received 25 orders for the model from New Delhi alone, equal to expected sales in Australia in a year.

“We are seeing strong expression of spending power in India,” said Brenda Pak, general manager, South and East Asia Pacific at Rolls-Royce. “India will be a very strong market for us in the years to come.”