Feb. 28 (Bloomberg) -- India's government slashed import tariffs to curb inflation and increased spending on ports, roads and farms to sustain economic growth that slowed last quarter.

Finance Minister Palaniappan Chidambaram reduced duties on coal, cooking oils and other imports in today's budget in New Delhi. Growth in Asia's fourth-largest economy unexpectedly eased to 8.6 percent in the three months ended Dec. 31 as farm output increased at the weakest pace in two years, the government said in a separate report today.

Rising prices of rice and wheat prompted Indian voters to oust Prime Minister Manmohan Singh's ruling Congress party in two state elections held this month. Chidambaram said the government is sticking to its forecast of 9.2 percent growth in the year to March 31, the fastest in almost two decades.

``The authorities are now seriously targeting prices,'' said Sanjeev Sanyal, senior economist at Deutsche Bank AG in Singapore. ``Agricultural growth does fluctuate from year to year, but India still has a very strong growth rate spurred by industry and services.''

Government spending on infrastructure including ports, power generation and roads will be raised by 40 percent to 1.34 trillion rupees ($30.2 billion) in the year starting April 1, Chidambaram told parliament. Better infrastructure may see more companies follow Nissan Motor Co. and Renault SA, which are investing in factories in India.

Stocks Tumble

India's rupee dropped the most in six weeks as the benchmark stock index slumped, declining as much as 0.4 percent to 44.370 against the dollar, spurring concern global investors will take money out. Indian stocks posted their biggest drop in eight months after Chidambaram included a tax increase on dividends in his budget. The yield on the benchmark ten-year bond rose 5 basis points to 7.94 percent.

Asian stocks fell the most in eight months, extending a rout in global equities that started in China and triggered a slump in the U.S. compounded by signs the world's largest economy is slowing.

India's $854 billion economy expanded at the slowest pace in a year last quarter, the Central Statistical Organisation said today. The government expects growth of close to 9 percent in the year starting April 1, Chidambaram said, the fastest pace after China among the world's major economies.

``India might grow as fast as China in the not-too-distant future,'' said Robert Kalin, who manages about 500 million euros ($661 million) in Indian stocks at DWS Investment GmbH in Frankfurt. ``Inflation may stay above the central bank's comfort zone for much of this year.''

Rivals China

Credit Suisse expects India's economy to expand 10 percent in 2007, faster than China's economy, which it forecasts will grow 9.9 percent during the period.

The benchmark inflation rate in India climbed to a two-year high of 6.73 percent this month, above the central bank's tolerance level of 5 percent, as sustained growth boosts demand for farm and factory products. Gains in consumer prices paid by farmers are at an eight-year high of 8.94 percent, while price increases for urban dwellers are the most in six years.

The Harvard-educated finance minister reduced import tariffs today for the second time in five weeks, betting cheaper imports will drive prices in the economy down. He unexpectedly cut duties on Jan. 22 on a range of products from steel to sulphur to palm oil, a month ahead of the scheduled budget announcement, to rein in prices.

Tariff Cuts

Chidambaram today also cut the maximum customs rate for manufactured goods to 10 percent from 12.5 percent, to align the levy with Association of Southeast Asian Nations such as Singapore, where the tariff ranges between zero and five percent.

The fastest loan growth since 1971 and higher salaries are enabling Indians to buy products from cars to houses, stretching the capacity of Gujarat Ambuja Cements Ltd. and other companies. The central bank, which has raised its key overnight lending rate five times in the past year, has warned areas such as housing are showing signs of overheating.

Higher incomes have increased demand for food products such as wheat, sugar and cooking oil. Singh's government today banned futures trading in wheat and rice to curb inflation, after earlier halting exports of wheat and pulses to augment supplies.

Slower agricultural growth has also put pressure on the price of staple foods in Asia's second-most populous nation. Farm output increased 1.5 percent in the quarter to Dec. 31, the government said today, slowing from 1.7 percent in the second quarter and 3.4 percent in the period before that. Manufacturing also cooled, recording an expansion of 10.7 percent, down from 11.9 percent in the previous quarter.

Monsoon Rains

``The growth numbers are surprising,'' said N. R. Bhanumurthy, an economist at the Institute of Economic Growth in New Delhi. ``The main culprit seems to be the sluggish growth in the farm sector. The unequal distribution of rains during the period seems to have impacted the agriculture growth.''

The agricultural sector in India, which accounts for a fifth of the South Asian economy, depends on the four-month monsoon rains ending September each year to water crops as only a third of the nation's arable land is irrigated.

India's 234 million agricultural workers may benefit from the government's farm credit target of 2.3 billion rupees announced today by Chidambaram.

Singh's ruling Congress party yesterday lost power in the northern states of Punjab and Uttarakhand among three elections this month. Singh wants to curb inflation ahead of polls in April in the more critical state of Uttar Pradesh, which sends a seventh of all lawmakers in parliament. The election outcome in Uttar Pradesh will set the tone for the next general elections due by April 2009.

Poor Infrastructure

Infrastructure deficiencies in India are hurting supplies and adding to the cost of companies operating in the $854 billion economy.

Lafarge India Pvt Ltd., the local unit of the world's largest cement maker, has its own power plant because government supplies are inadequate. Ford Motor Co., which has a factory in southern India, requires its engine supplier in central state of Madhya Pradesh to install global positioning system devices in its delivery trucks to locate vehicles stuck in traffic so that it can adjust production schedules.

Tax Revenue

India produces about 8 percent less electricity than it needs, cutting gross domestic product by a 10th, the finance ministry estimates. Highways, which move almost 80 percent of the goods transported in India, account for only about 2 percent of the country's roads. It takes an average 85 hours to unload and reload a ship at India's major ports, 10 times longer than in Hong Kong or Singapore, according to government figures.

``Tax revenue has been buoyant this year because of an acceleration in economic growth,'' said N. R. Bhanumurthy, an economist at Institute of Economic Growth in New Delhi. ``The government's finances are improving rapidly and it is finding resources for infrastructure spending.''

Chidambaram said he plans to narrow the budget deficit to 3.3 percent of gross domestic product in the year ending March 31, 2008 from an estimated 3.7 percent in the previous year.

To contact the reporter responsible for this story: Cherian Thomas in New Delhi at cthomas1@bloomberg.net Anand Krishnamoorthy in New Delhi at anandk@bloomberg.net

Last Updated: February 28, 2007 07:09 EST