India's Economy Probably Expanded at Slowest Pace Since 2005

By Cherian Thomas
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Aug. 29 (Bloomberg) -- India's economy probably grew at the slowest pace since 2005 last quarter as the fastest inflation in a decade and higher borrowing costs damped consumer spending.

Asia's third-largest economy expanded 8 percent in the three months to June 30 from a year earlier, following an 8.8 percent gain in the previous quarter, according to the median forecast of 25 analysts in a Bloomberg News survey. The figures are due to be released today around noon in New Delhi.

Higher fuel and food prices have pushed inflation to 12.4 percent and forced the Reserve Bank of India to raise interest rates three times since June. The central bank still expects the economy to expand around 8 percent this year, almost double the average pace since India's independence in 1947.

``India's growth is still pretty good,'' said Dariusz Kowalczyk, chief investment strategist with CFC Seymour Ltd. in Hong Kong. ``But it won't be as good as it was in the last few years because of the aggressive monetary tightening.''

India may lose its position as the world's fastest-growing major economy after China this year, according to World Bank estimates. Russia's economy may grow 7.1 percent in 2008, overtaking India's 7 percent expansion this year, while China may increase 9.4 percent this year, the bank forecast in June.

Reserve Bank of India Governor Yaga Venugopal Reddy, scheduled to retire Sept. 5, said controlling inflation will be the central bank's ``overriding priority'' after he raised the key repurchase rate to 9 percent, a seven-year high, last month.

`Line of Defense'

The finance ministry says monetary policy should be the ``first line of defense'' against inflation. The repurchase rate will climb to between 9.25 percent and 9.5 percent by the end of October, according to eight of 12 economists surveyed by Bloomberg News after the last monetary policy statement 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.''

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. Singh lost ground in nine of 11 state elections since January 2007 because of rising prices. General elections are scheduled to be held before May.

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

Loan Waiver

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.

Industry, which makes up a quarter of gross domestic product, is also getting support from investments in India's special economic zones, which are enclaves with uninterrupted power, water and other infrastructure support for manufacturers. Investments may reach 2 trillion rupees ($45 billion) in about 250 zones by December 2009, the commerce ministry estimates.

Still, 8 percent 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.

India's passenger car sales were almost stagnant in July. Maruti Suzuki India Ltd., maker of half the cars in the 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.

Cement Sales

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. Sales rose by 1.2 percent as construction slowed.

India's benchmark Sensitive index has declined by a third this year, while the yield on the key 10-year bond has climbed about 60 basis points to 8.80 percent. The rupee has weakened 8.3 percent against the U.S. dollar since Jan. 1.

Services, which account for 55 percent of the economy, may have also been dented in the second quarter because of higher interest rates.

Banking services, for example, will probably take a hit after loan growth at Indian banks slowed to about 23.5 percent in the first six months of this year, compared with 27.8 percent a year earlier, according to the central bank.

``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.''

The June-September monsoon, which accounts for four-fifths of the nation's annual rainfall, was 1 percent below average in the week ended Aug. 24, according to the weather office. A normal monsoon will help the country's 234 million farmers harvest a bigger crop, boosting incomes.

Agriculture makes up about 20 percent of India's economy, though it provides a livelihood to three-fifths of India's 1.1 billion people who dwell in rural areas.

India's GDP Forecasts

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                                  GDP YoY%
Company                          April-June
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Median                                 8.0%
Average                                8.0%
High                                   8.6%
Low                                    7.6%
Number of Estimates                     25
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ABN Amro Bank                          8.0%
Anand Rathi Securities                 7.9%
Axis Bank Ltd.                         7.8%
CARE Ratings                           8.6%
CFC Seymour                            8.3%
Citi                                   7.6%
CRISIL Ltd.                            7.9%
DBS Group                              8.6%
Dun & Bradstreet Info.                 8.0%
Edelweiss Securities                   7.9%
Forecast Singapore                     8.2%
HSBC Singapore                         8.2%
ICICI Securities                       7.8%
IDBI Gilts Ltd.                        7.9%
JPMorgan Chase Bank                    7.9%
Kotak Mahindra Bank                    7.8%
Kotak Securities Ltd.                  8.0%
Lehman Brothers                        8.1%
Macquarie Capital Securities           8.0%
Moody's Economy.com Inc.               8.0%
Reuters IFR                            8.2%
Securities Trading Corp. Of India      7.9%
Standard Chartered Bank                8.1%
UBS                                    7.8%
Yes Bank                               8.5%
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To contact the reporter on this story: Cherian Thomas in New Delhi at cthomas1@bloomberg.net