By Cherian Thomas
May 29 (Bloomberg) -- India’s economy grew more than expected last quarter, easing pressure on Prime Minister Manmohan Singh to revive consumer demand as he starts his second term in office. Stocks and the rupee gained.
Asia’s third-largest economy expanded 5.8 percent in the three months to March 31, matching the revised gain of the previous quarter, the statistics office said in New Delhi today. Economists were expecting a 5 percent increase.
Growth is still almost half the pace at which India expanded in the past five years and Finance Minister Pranab Mukherjee this week pledged to boost spending in July’s budget. The economy is already showing “some signs” of revival from interest-rate cuts and fiscal stimulus worth 7 percent of gross domestic product, Mukherjee said.
“A 5 percent growth rate isn’t enough to absorb the rise in working population, risking unemployment,” said Robert Prior-Wandesforde, senior Asian economist at HSBC Holdings Plc in Singapore. “It’s important to see how the issue is tackled in the budget -- too much in the way of giveaways may lead to further sell-off in the bond market.”
Stocks extended their gains after the better-than-expected growth figures, with the Bombay Stock Exchange’s Sensitive Index rising 1.6 percent to 14,519.75 at 11:05 a.m. in Mumbai. The rupee strengthened, advancing to 47.39 a dollar immediately after the report, from 47.46 earlier, according to data compiled by Bloomberg.
Asset Sales
The yield on benchmark bonds has climbed 28 basis points percent to 6.7 percent since Singh’s May 16 electoral triumph on concern the government will borrow more to fund its budget.
Still, India’s key Sensitive stock index has surged 18 percent during the period on optimism a coalition without communist parties will allow Singh to sell state assets and accept more foreign investments in insurance and banking.
The sale of stakes in state-run companies such as National Hydroelectric Power Corp. and Oil India Ltd. is vital for Mukherjee to find money to spend without widening a budget deficit that Moody’s Investors Service says has ‘deteriorated.”
India’s budget shortfall stood at 6 percent of GDP in the year ended March 31, more than double the target. Moody’s has kept India’s local-currency long-term rating at Ba2, two levels below investment grade while Standard & Poor’s has a BBB- rating on India, the lowest investment grade.
‘Key Reforms’
“The unexpected election outcome provides scope for rationalizing spending, pushing ahead with disinvestments and key reforms,” Moody’s said in its annual report yesterday.
For now, Mukherjee said this week he plans to spend more to stimulate the economy, betting it will help boost tax revenues. He said the election results vindicate the strategy to pursue growth as a tool to improve people’s livelihood.
Almost 10 million people join India’s workforce each year and the International Labour Organization says India needs at least 10 percent economic growth each year for a one percent increase in employment.
Lower interest rates and increased government spending is starting to yield results in the economy.
Car sales and the production of cement, electricity and refined petroleum are showing signs of revival. India’s passenger car sales increased 4.2 percent in April from a year earlier, after a 1 percent gain in March. Cement production jumped 10.1 percent in March and electricity output rose 5.9 percent from a year ago, according to government data.
Forecasts Raised
UBS AG raised its growth forecast for India to 6.2 percent in the year ending March 2010, compared with an earlier prediction of 5.2 percent. Standard Chartered economist Anubhuti Sahay said risks to the bank’s 5 percent forecast for the same period were now “to the upside” and Morgan Stanley’s Chetan Ahya raised his estimate to 5.8 percent from 4.4 percent.
The 73-year-old Mukherjee returned to the finance ministry after a quarter of a century. As the finance minister in Indira Gandhi’s cabinet from 1982 to 1984, he ran an economy that was almost closed and insulated from the global economy.
Singh, as finance minister between 1991 and 1996, abandoned the Soviet-style state planning and introduced free-market policies that have helped the economy quadruple to $1.2 trillion. Mukherjee said this week he will draft the budget with Singh, renewing a relationship that started in the early 1980s when he appointed Singh as the central bank governor.
‘Game-Changing’
Singh’s election triumph has been a “game-changing” verdict, says Macquarie Group Ltd. economist Rajeev Malik, describing it as a “catalyst in enhancing the evolving global rise of the Indian economy.”
In Singh’s first term between 2004 and 2009, India’s economy grew close to 9 percent on average each year, the fastest pace since independence in 1947, helped by a six-fold surge in foreign direct investments to $38 billion.
General Electric Co. Chief Executive Officer Jeffrey Immelt said yesterday the Indian elections was the best development in the country that he’d seen in 20 years and he was “completely optimistic about India in the long term.”
At stake are economic changes blocked by Singh’s erstwhile communist partners such as a bill to raise the foreign investment ceiling for Prudential Plc and other insurers to 49 percent from 26 percent, and other proposed legislation aimed at removing a 10 percent cap on the voting rights of foreign investors in non-state banks. The government also wants to allow global retailers such as Wal-Mart Stores Inc. into India.
“The future looks promising in India,” said Fumio Ito, president of Kuraray Co. Ltd., the Tokyo-based chemicals maker, which this week announced the opening of its marketing unit in India. “When our operations expand, we will consider building a production plant in India.”
To contact the reporter on this story: Cherian Thomas in New Delhi at Cthomas1@bloomberg.net.
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