India’s Growth Accelerates for First Time Since 2007

By Cherian Thomas

Aug. 31 (Bloomberg) -- India’s economic growth accelerated for the first time since 2007, indicating the global recession’s impact on Asia’s third-largest economy is waning.

Gross domestic product expanded 6.1 percent last quarter from a year earlier after a 5.8 percent rise in the previous quarter, the Central Statistical Organisation said in New Delhi today. Economists forecast a 6.2 percent gain.

India joins China, Japan and Indonesia in rebounding as Asia benefits from more than $950 billion of stimulus spending and lower borrowing costs. India’s recovery may stall as drought threatens to reduce harvests and spur food inflation, making it harder for the central bank to judge when to raise interest rates.

“The weak monsoon has complicated the situation for the central bank,” said Saugata Bhattacharya, an economist at Axis Bank Ltd. in Mumbai. “Poor rains will hurt growth and stoke inflationary pressures as well.”

India’s benchmark Sensitive stock index maintained its declines today, dropping 1 percent to 15755.33 in Mumbai at 11:12 a.m. local time. The yield on the key 7-year government bond held at a nine-month high of 7.43 percent, while the rupee was little changed at 48.86 per dollar.

Before the rains turned scanty, the Reserve Bank of India on July 28 forecast the economy would grow 6 percent “with an upward bias” in the year to March 31, the weakest pace since 2003. It also raised its inflation forecast to 5 percent from 4 percent by the end of the financial year. The key wholesale price inflation index fell 0.95 percent in the week to Aug. 15.

‘Recovery Impulses’

The central bank’s Aug. 27 annual report said withdrawing the cheap money available in the economy would heighten the risk of weakening “recovery impulses,” while sustaining inexpensive credit for too long “can only increase inflation in the future.”

As the global recession hit India, the central bank injected about 5.6 trillion rupees ($115 billion) into the economy, which together with government fiscal stimulus amounts to more than 12 percent of gross domestic product.

The Reserve Bank kept borrowing costs unchanged in its last monetary policy statement on July 28 and signaled an end to its deepest round of interest-rate cuts on concern that inflation will “creep up” from October. The next policy meeting is scheduled for Oct. 27.

Harvests Hit

Manufacturing in India rebounded to 3.4 percent growth in the quarter ended June 30 after shrinking 1.4 percent in the previous three months. Mining rose 7.9 percent compared with 1.6 percent while electricity growth almost doubled to 6.2 percent during the period, today’s statement said.

The move of the Indian economy to a higher growth trajectory is on course, Ashok Chawla, the top bureaucrat in the finance ministry, told reporters in Mumbai.

Drought or drought-like conditions has been declared in 278 districts in India, or 44 percent of the nation’s total, as rainfall has been 25 percent below average so far in the four- month monsoon season that started June 1, the farm ministry said Aug. 27.

Morgan Stanley economist Chetan Ahya and Nomura Securities Co. economist Sonal Varma said the drought will trim farm production though its impact on industry and services will be limited. Services including banking and software make up 55 percent of India’s $1.2 trillion economy, while industry accounts for a quarter.

New Factories

“The lagged impact of monetary and fiscal policy action, improved business confidence in view of increased political stability, and recovery in external demand should ensure that the growth acceleration is sustained,” Ahya said.

India’s industrial production in June gained 7.8 percent from a year earlier, the fastest pace in 16 months, the government said Aug. 12.

Ahya expects the economy to grow between 5.2 percent and 5.8 percent in the year to March 31. That pace still makes India the fastest growing major economy after China, attracting overseas companies including Harley-Davidson Inc., the biggest U.S. motorcycle maker. The U.S. economy shrank at a 1 percent annual rate last quarter. Chinese GDP rose 7.9 percent in the second quarter from a year earlier.

Harley-Davidson said last week it plans to start sales in India from next year.

Steel Authority of India Ltd., the nation’s second-largest steelmaker, said this month that demand for so-called flat products, mainly used to make automobiles, is rising and increased their prices by 900 rupees, or 3.4 percent, a ton.

Volkswagen AG, Toyota Motor Corp. and other car manufacturers have announced plans to spend more than $6 billion through 2012 to build factories in India to offset slumping demand in their home markets.

“Economic growth in India is still very good,” said Jnaneswar Sen, vice president in the Indian unit of Honda Motor Co., Japan’s second-largest carmaker. Honda plans to increase production in India by 50 percent from next month in response to rising demand.

To contact the reporter on this story: Cherian Thomas in New Delhi at Cthomas1@bloomberg.net.