May 31 (Bloomberg) -- India's economy grew at the fastest pace in almost 20 years as companies lifted production to meet surging consumer demand.

South Asia's largest economy expanded 9.4 percent in the year ended March 31, the biggest gain since 1989 and more than the government's initial estimate of 9.2 percent, the Central Statistical Organisation said in New Delhi today.

General Motors Corp., Tata Steel Ltd. and other companies are increasing output in India at the quickest pace in a decade to meet soaring demand from a middle class that's swelled to the size of the U.S. population. Economic growth may start to slow after central bank Governor Yaga Venugopal Reddy raised interest rates to a five-year high to curb inflation.

``We should be prepared for a soft landing,'' said Navneet Munot, who helps manage the equivalent of more than $4 billion at Birla Sun Life Asset Management Co. in Mumbai. ``The economy should expand at about 8 percent or more.''

India's economy grew 9.1 percent in the three months to March 31, according to today's report, averaging a quarterly pace of 8.8 percent in the past two years compared with 5.7 percent in the 1990s. That's stoked demand for manufactured and farm goods and pushed inflation to a two-year high in January.

``Soft landing no longer means we are back to the days of 5 or 6 percent growth,'' Munot said.

Stocks Gain

India's Sensitive index gained 0.9 percent to 14544.46 on the Bombay Stock Exchange. The yield on the 10-year government bond dropped 3 basis points, or 0.03 percentage point, to 8.075 percent. The rupee climbed the most in more than two weeks, rounding off three months of gains. It rose 0.6 percent today to 40.62 as of 5 p.m. in Mumbai.

The Reserve Bank of India raised its key rate seven times in the past 1 1/2 years to tame price gains and loan growth. That's discouraging borrowers and has helped ease inflation to an eight-month low of 5.27 percent in the second week of May.

``The measures taken by the Reserve Bank are beginning to have a moderating impact,'' said Mahendra Jajoo, the Mumbai- based head of fixed income at ABN Amro Asset Management Co. in India. ``The overall feeling is that any more increases in interest rates may begin to hurt growth.''

Manufacturing gained 12.4 percent in the last quarter, while mining rose 7.1 percent and electricity output climbed 6.9 percent during the period, today's report said.

Car sales in the past two months grew at the slowest pace in a year, according to data from the Society of Indian Automobile Manufacturers. Almost three-quarters of cars sold in India are financed by commercial banks. Hero Honda Motors Ltd., India's biggest motorcycle maker, suffered a 27 percent drop in profit last quarter.

Stronger Currency

Industrial production, which accounts for a quarter of the economy, may also slow because of weak exports after the rupee rose close to a nine-year high. The central bank has slowed dollar purchases on concern that rupee funds injected from intervention will stoke inflation.

Exports, which account for two-fifths of India's industrial output, rose 8.8 percent in March, a third of the pace of the past year. The rupee has gained 8 percent against the U.S. dollar since Jan. 1.

The Organization for Economic Cooperation and Development last week forecast India's growth will slow to 8.5 percent in 2007 from 9 percent in the previous year as rising interest rates puts the brake on consumer spending. Still, the pace is lower than only China among the world's largest economies. The OECD estimates China to expand 10.4 percent this year.

`Remain Strong'

``There aren't many economies in the world that are growing at over 8 percent,'' said Claudio Bernasconi, who helps manage $42 million of Indian stocks at Banque Cantonale Vaudoise in Lausanne, Switzerland. ``Disposable incomes are rising in India and growth may remain strong in the coming quarters.''

The middle class in India, people earning from $4,545 to $23,000 a year, has tripled to 300 million in the past 20 years as growth gathered momentum, according to the National Council for Applied Economic Research.

India is the world's fastest-growing wireless market as only 16 percent of the nation's 1.1 billion people own mobile phones. Half the population has no access to finance from a bank or a money lender, while only seven of 1,000 people own a car in India compared to 500 of 1,000 in Western Europe.

Services such as telecommunications and banking, which has doubled its share in the economy to 55 percent in the past two decades, grew 9.9 percent in the quarter ended March 31.

Agriculture, which accounts for a fifth of the economy and provides livelihood to more than three-fifths of the country's population, grew 3.8 percent last quarter, better than the 2.7 percent forecast in February.

In anticipation of growing demand, foreign companies are building factories and buying more shares in India.

General Motors, the world's largest automaker, is spending more than $300 million to set up its second factory in India, where the government estimates car sales may triple to 3 million units by 2015.

To contact the reporter on this story: Cherian Thomas in New Delhi at cthomas1@bloomberg.net

Last Updated: May 31, 2007 08:29 EDT