India's Economy Grows 7.9%, Slowest Pace Since 2004

By Cherian Thomas

Aug. 29 (Bloomberg) -- India's economy grew at the slowest pace since 2004 last quarter as the fastest inflation in a decade and increased borrowing costs damped consumer spending.

Asia's third-largest economy expanded 7.9 percent in the three months to June 30 from a year earlier, following an 8.8 percent gain in the previous quarter, the Central Statistical Organisation said in a statement in New Delhi today. Analysts expected gross domestic product to increase 8 percent.

Inflation has almost tripled this year to 12.4 percent amid higher fuel and food prices, forcing the central bank to raise interest rates three times since June. While growth is almost double the average pace since India's independence in 1947, it is slowing along with the other so-called BRIC economies of Russia, Brazil and China.

``We don't expect India's slowdown to be too dramatic,'' said Philip Wyatt, a senior economist at UBS AG in Hong Kong. ``There will be a gradual slowdown in GDP growth throughout this year - the industrial side of GDP is already slowing.''

India's benchmark Sensitive index, which has declined by a third this year, rose 3.4 percent to 14522.82 at noon on the Bombay Stock Exchange, while the yield on the key 10-year bond fell 11 basis points to 8.66 percent. The rupee was little changed at 43.755 against the U.S. dollar.

China, Russia

Finance Minister Palaniappan Chidambaram said today that growth for the year to March 31 will be close to 8 percent. India risks being overtaken by Russia as the world's fastest expanding major economy after China this year. Russia's economy may grow 7.1 percent in 2008, surpassing India's 7 percent expansion this year, according to World Bank estimates.

The World Bank expects the U.S. economy to expand 1.1 percent this year, half of 2007's pace. The U.S. economy grew at a faster-than-expected 3.3 percent annual rate in the second quarter, helped by a surge in exports that will probably wane as Europe and Japan head toward recessions.

India's expansion slowed in the second quarter as construction growth weakened to 11.4 percent from 12.6 percent in the previous three months and manufacturing gained 5.6 percent compared with 5.8 percent in the first quarter, today's report said.

ACC Ltd., India's biggest cement-maker, reported a worse- than-estimated 27 percent drop in second-quarter profit on fuel costs and government-enforced price curbs to check inflation.

`Overriding Priority'

Passenger car sales were almost stagnant in July. Maruti Suzuki India Ltd., maker of half the cars in the South Asian country, posted a 1.5 percent gain in sales while Hyundai Motor Co.'s India unit, the nation's second-largest carmaker, boosted sales by 0.5 percent.

Reserve Bank of India Governor Yaga Venugopal Reddy, due to retire Sept. 5, raised the key repurchase rate to a seven-year high of 9 percent last month and said controlling inflation will be the central bank's ``overriding priority.'' The rate may climb to between 9.25 percent and 9.5 percent by the end of October, according to eight of 12 economists surveyed by Bloomberg after the last policy statement on July 29.

``High inflation and interest rates are issues that are bothering the industry as they have an impact on consumer demand and hurt corporate profitability,'' said Kundapur Vaman Kamath, chief executive officer at ICICI Bank Ltd., India's second- largest lender. ``Until we see inflation easing, it would be unrealistic to expect an easing of monetary policy.''

Electoral Setback

Services including banking, transportation and hotels grew 10 percent in the second quarter from a year earlier, slowing from an 11.2 percent gain in the previous three months, according to today's report. Agriculture increased 3 percent from an earlier advance of 2.9 percent.

Inflation can win or lose elections in India, where about 456 million people live below the World Bank's poverty line of $1.25 a day. Prime Minister Manmohan Singh's Congress Party lost ground in nine of 11 state elections since January 2007 because of rising prices. General elections are scheduled to be held before May.

Singh said this month he doesn't want growth to suffer in the battle against inflation, adding faster economic expansion is vital to eradicating poverty.

In February, Singh wrote off $17 billion of farm loans and this month increased salaries of about 5 million government employees by 21 percent to spur consumer demand.

The central bank's forecast of 8 percent economic growth in the year to March 31 will be weakest expansion since 2003 and comes after Singh presided over record average annual growth of 8.9 percent since 2004.

The June-September monsoon, which accounts for four-fifths of the nation's annual rainfall, was 39 percent below average in the week ended Aug. 27, according to the weather office. A normal monsoon will help the country's 234 million farmers harvest a bigger crop and boost rural incomes.

``Going forward, agriculture will hold the key for both industry and overall growth,'' said Tushar Poddar, a Mumbai- based economist at Goldman Sachs. ``The monsoon will be critical in that regard.''

To contact the reporter on this story: Cherian Thomas in New Delhi at cthomas1@bloomberg.net