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India’s growth slips to 8.9% in Q2

Central bank may end 3 years of interest rate hikes on slowdown in expansion

(NEW DELHI) India’s economy grew last quarter at the slowest pace since 2006, signalling the central bank may soon end three years of inflation-fighting rate increases.

Asia’s third-largest economy expanded 8.9 per cent in the three months to Sept 30 from a year earlier after a 9.3 per cent increase in the previous quarter, the statistics office said yesterday in New Delhi. Analysts expected an 8.7 per cent gain.

‘Removing bottlenecks is central for India’s growth to continue,’ said Maya Bhandari, an economist at Lombard Street Research Ltd in London. ‘India is growing at its potential, its macro fundamentals are solid and you have a situation where companies will put more money there.’ The Reserve Bank of India expects growth in the year to March to ease to 8.5 per cent after it raised interest rates nine times since 2004 to curb consumer-price gains.

Inflation was 3.01 per cent in the week ending Nov 10.

Manufacturing gained 8.6 per cent last quarter from a year earlier, easing from a previous increase of 11.9 per cent.

Electricity output slowed to 7.3 per cent from 8.3 per cent, while farming rose 3.6 per cent after a 3.8 per cent gain in the quarter ended June 30.

Higher interest rates have curbed demand for cars and motorbikes, prompting Tata Motors Ltd and Hero Honda Motors Ltd to delay opening new factories and cut output. Demand for paper may wane from next year, said Gautam Thapar, chairman of Ballarpur Industries Ltd, India’s biggest maker of writing and printing paper.

Still, economic expansion in this financial year almost matches the average 8.6 per cent growth from 2003, the quickest pace in the Asian nation’s history since independence in 1947. That’s boosting profits for companies doing business in India.

South Africa’s Richards Bay Coal Terminal, the world’s biggest coal-export facility, expects a 30-fold surge in sales to India this year. Holcim Ltd, the world’s second-largest cement maker, said last month that its third-quarter profit rose 28 per cent as plants in India and China ran at full capacity.

‘This trend will continue because of all the work on infrastructure,’ said Jerome Lombardi, a business development manager at Holcim Group Support (S) Pte Ltd in Singapore. ‘When there is a global crisis we would rely on countries like India and China to sustain our growth.’ With exports accounting for only 23 per cent of India’s US $906 billion economy, Lehman Brothers Inc expects the South Asian nation to be immune to a deceleration in world growth sparked by mortgage defaults in the US.

India’s pace of growth is almost three times the economic expansion in the US and countries that share the euro, and falls only behind China’s 11.5 per cent gain last quarter among the world’s top 15 economies.

Global producers of cement, steel, aluminum, copper and other products are benefiting from an unprecedented drive by India to modernise and expand roads, ports and other infrastructure. Mr Singh’s government aims to attract US$500 billion by 2012 in India’s infrastructure.

The government will next week consider easing foreign investment rules in aircraft maintenance companies, petroleum marketing firms and commodity exchanges, the Economic Times reported. Since assuming office in May 2004, the government has relaxed foreign investments in telecommunications and single- brand retail outlets.

The Indian economy has quadrupled in size since 1991, when the Oxford-educated Singh as the finance minister, introduced free-market measures that cut red tape and allowed foreign companies to set up operations locally.

That’s helped double per capita income in the last eight years.

 

Source: Bloomberg (Business Times 1 Nov 07)

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