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Growth may slow for first time in 3 years

Govt forecasts India’s economy to expand 8.7% as higher interest rates cool consumer demand

(NEW DELHI) India’s government expects economic growth to slow for the first time in three years, as higher interest rates cool consumer demand for homes, motorcycles and electric appliances.

Asia’s third largest economy is forecast to expand 8.7 per cent in the 12 months to March 31, the weakest pace since 2005, the statistics office said in a release in New Delhi on Thursday. Growth was 9.6 per cent last financial year.

The pace of expansion will still be the quickest after China among the world’s major economies. And it may remain so even if the US suffers a recession as India’s growth is being driven by the spending of a middle class of about 50 million people, equal to the combined population of Singapore, Hong Kong, Malaysia and Australia.

‘This is not a collapse,’ said Sonal Varma, a Mumbai-based economist at Lehman Brothers Inc. ‘Growth is slowing because of higher real interest rates. US recession or not, the structural drivers of India’s rising potential growth remain intact.’

The government’s growth estimate beats the central bank’s 8.5 per cent forecast and is almost in line with the average 8.8 per cent annual growth in the previous four years, the best expansion since the country’s independence in 1947.

Finance Minister Palaniappan Chidambaram who said that he was ‘disappointed but not too despondent’, expects the final growth figure to be closer to target.

‘Growth will be closer to 9 per cent than what may appear at this moment,’ Mr Chidambaram told reporters here on Thursday.

Reserve Bank of India governor Yaga Venugopal Reddy has raised interest rates nine times since October 2004 and ordered banks to set aside more money as reserves five times since December 2006 to contain inflation stoked by rapid consumer demand and high oil and food prices. The central bank has also allowed the rupee to strengthen to near a decade-high to make imports cheaper.

Six of nine economists surveyed by Bloomberg News last week said that Mr Reddy will maintain the repurchase rate at 7.75 per cent, the highest in six years, in the next monetary policy statement on April 29, as inflation still does not reflect last year’s 57 per cent increase in crude oil costs.

Inflation, currently at a five-month high of 3.93 per cent, may also accelerate on increased money supply caused by capital flows from overseas investors, seeking higher returns in India, where growth is almost three times that in the US, Europe and Japan. Only China, among economies of more than US$500 billion, grew faster than India, at an 11.2 per cent pace last quarter.

Global investors bought a record US$17.2 billion of shares and US$2.3 billion of bonds in India last year.

Higher interest rates have reduced demand in some segments of the Indian economy. Property prices, for example, have declined. The value of residential flats in Gurgaon, a suburb outside the capital New Delhi, have dropped 40 per cent in the nine months ended Sept 30, according to real estate company Cushman & Wakefield Inc.

India’s manufacturing is expected to expand 9.4 per cent this fiscal year, according to Thursday’s statement.

Agricultural output may grow 2.6 per cent and financial services will advance 11.7 per cent. Bajaj Auto Ltd, India’s second largest motorcycle maker, posted a 7.2 per cent drop in sales in December, its 11th straight month of declines.

‘Rising incomes should support consumption growth,’ Andrea Richter Hume, an International Monetary Fund economist, said in a report on India this week. The IMF expected the South Asian nation to grow at 8 per cent ‘over the next few years’.

India’s middle class, those with annual disposable incomes between US$4,380 and US$21,890, has more than doubled to 50 million in the past decade, according to McKinsey & Co, the New York-based consulting firm. It estimated that this group will further increase tenfold to 583 million people by 2025.

Incomes are rising in India because of a spurt in economic growth after Prime Minister Manmohan Singh started dismantling barriers to foreign investment and other Soviet- style controls on industry when he was finance minister in 1991.

India’s economy has expanded at an average annual pace of 6.3 per cent since 1991, compared with growth of about 3.5 per cent between 1950 and 1980.

That acceleration in growth is attracting companies such as Glitnir Bank, Iceland’s third biggest lender by market value, and McDonald’s Corp to India.

‘We think this is the perfect time for us to come to India,’ said Bala Kamallakharan, executive director at Glitnir, which on Wednesday unveiled an Indian joint venture with the LNJ Bhilwara Group to produce thermal energy.

Glitnir is not alone in trying to tap opportunities in India. McDonald’s, the world’s largest restaurant company, last month said that it will boost its stores in India this year by as much as 30 per cent.

Volvo AB, the world’s second largest truckmaker, plans to create a joint venture with India’s Eicher Motors Ltd to win a larger share of the fourth largest truck market, the Swedish company said in December.


Source: Bloomberg (Business Times 9 Feb 08)


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