India's Economy Grows 8.9%

NEW DELHI – India's economy grew 8.9% in the quarter ended Sept. 30, maintaining its dramatic expansion when many western economies are struggling to resuscitate growth.

The rise in Gross Domestic Product, following on from an 8.9% on-year rise in the previous quarter, marks India as one of the world's fastest growing economies and will likely allow the Reserve Bank of India to raise interest rates again soon, seeking to tame inflation, without fear of a major hit to growth.

It also prompted Finance Minister Pranab Mukherjee to revise higher his growth forecast for the year ending next March 31, to 8.75% from a previous estimate of 8.5%.

The benchmark 30-share BSE Sensex rose following the strong GDP data, ending up 0.6% at 19,521.25. Government bonds fell as investors saw a greater chance of interest rate hikes by the RBI. The benchmark 7.80% bond due 2020 ended at 98.25 rupees, compared to the previous close at 98.59 rupees.
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"Inflation is still the number one policy focus, and we continue to expect more rate hikes in the months ahead, perhaps as soon as the next meeting in December," said Brian Jackson, senior emerging markets strategist at Royal Bank of Canada. The central bank has raised its key interest rates six times since March as it tries to control inflation. It last raised rates by 0.25 percentage point Nov. 2.

The growth was confirmation that India, which is less reliant on exports for growth than many smaller Asian nations, has been able not only to shrug off the global downturn but accelerate growth while other nations are struggling to emerge from the downturn.

That's thanks to robust domestic demand. In the three months ended Sept. 30, farm output, which constitutes about 16% of GDP, rose 4.4%, quicker than the 2.5% rise in the previous quarter. Services like trade, hotels and transport grew 12.1%, while manufacturing output rose 9.8%.

The government hopes to return to its pre-crisis growth rate of 9% in the year beginning April 1, 2011. Ultimately it hopes to achieve double-digit growth and outpace its larger northern neighbor, China, the only major economy growing more quickly than India's.

The rapid expansion is expected to continue to attract a hefty inflow of foreign funds into India's stock market, which has risen sharply this year as investors worldwide seek fast-growing markets.

But some analysts say growth may be curtailed in the next year. Robert Prior-Wandesforde, a Credit Suisse economist, predicted that growth will remain strong through March but then "a combination of higher oil prices, a strengthening real exchange rate and, most importantly, the lagged impact of higher interest rates is likely to take its toll on economic activity."

He predicts GDP growth of 7.7% in the year ending March 31, 2012.

For now, however, the GDP growth will come as a fillip for the government of Prime Minister Manmohan Singh, which has faced tough times in recent weeks. A government auditor found that an allotment of second-generation mobile telephone spectrum sold in 2008 deprived the government of as much as $40 billion in potential revenue because the spectrum was sold to a few favored companies, vastly underpriced.

The government's legislative agenda has been stalled in Parliament amid opposition protests and demands for a wider probe into the scandal, which forced the telecommunications minister to resign.