June 30 (Bloomberg) -- India's economy accelerated in the three months to March 31 to its fastest pace in three quarters as manufacturers built factories and the government lifted spending on roads, railways and irrigation.

Asia's fourth-largest economy expanded 7 percent from a year earlier, compared with a revised 6.4 percent gain in the previous quarter, the Central Statistical Organization said in New Delhi today. The median forecast of seven economists in a Bloomberg survey was for growth of 6.8 percent.

Companies including Hyundai Motor India Ltd. say they plan to lift investment to tap demand that's being fueled by the cheapest credit in 32 years. Corporate and government investment may help India meet Prime Minister Manmohan Singh's target of 7 percent annual growth in the fiscal year that started on April 1.

``Companies are utilizing their capacity to meet demand as the economy expands, driving further growth,'' said Viswanathan Vasudevan, who helps manage $150 million of stocks at Aquarius Investment Advisors in Singapore.

Manufacturers are spending more on equipment as they expand. Production, which accounts for 27 percent of the economy, grew 8 percent last fiscal year, the fastest in five years. The pace picked up to 8.8 percent in April.

Singh's government is setting aside more money to improve India's infrastructure. It has increased spending on highways to 32.7 billion rupees in the year ending March 31 from 18.5 billion rupees a year earlier.

Power Plants

The government says it needs to attract a further $150 billion in the next decade to build power plants, expand the highway and rail network and modernize its ports.

Hyundai Motor India, the local unit of South Korea's biggest automaker, said on March 18 it plans to invest $500 million in India by 2008 as it vies for sales with Suzuki Motor Corp. and General Motors Corp.

``There is a significant growth in disposable income,'' said B.V.R. Subbu, president of Hyundai Motor India Ltd., which said sales increased 34 percent in the year ended March 31.

Rising earnings have lifted the benchmark Mumbai stock exchange Sensitive Index by 43 percent in the past year, led by ITC Ltd., the country's biggest tobacco company and its second- biggest chain of luxury hotels, and Tata Steel Ltd., India's second-biggest steelmaker.

The government is taking steps to further spur growth by easing ownership rules in telecommunications, aviation and banks. Finance Minister P. Chidambaram lowered the corporate tax rate, including surcharges, to 33 percent from 35.875 percent in the budget for the fiscal year started April 1.

Deregulation

Chidambaram also cut tariff on most imports to 15 percent from 20 percent, with rates as low as 10 percent on textile machinery and refrigeration equipment.

``The government has been implementing deregulation and liberalization which has encouraged private sector participation in accelerating growth,'' said Chetan Ahya, an economist at JM Morgan Stanley in Mumbai. ``There's a need to push up infrastructure investment in both the rural and urban economy.''

Consumer spending is being stoked by low borrowing costs. India's central bank on April 28 held its benchmark bank rate, at which it lends to banks, at 6 percent. The bank has kept the rate unchanged since April 2003.

Bank lending rose 31 percent in the year ended March 31, according to data from the central bank. That's the biggest increase since 1971, when the central bank began tracking lending.

Farmers

``Low interest rates and global liquidity has pushed growth higher in the past three years,'' said Ahya. ``Banks have got recapitalized with interest rates falling. It has allowed them to be liberal in their lending.''

Singh's government is also asking banks to lend more to farmers. Chidambaram earlier this month said state-owned banks would boost lending to farmers by 23 percent to 1.41 trillion rupees in the year ending March 31. The lenders had exceeded the 1.05 trillion rupee target set last year by the government.

The government is betting easier access to loans will encourage farmers to buy higher quality seeds and adopt modern farming technologies to boost yields.

India, the world's third-biggest producer of wheat, harvests 2.74 metric tons of the grain per hectare compared with a yield of 3.83 metric tons in China, the biggest producer.

The world's second-most populous nation still depends on the June-September monsoon rainfall, which provides 80 percent of annual rains, to cultivate about 60 percent of the crop land.

India's monsoon rainfall was 35 percent below average in the first 27 days of the month, according to the New Delhi-based India Meteorological Department.

To contact the reporter on this story: Subramaniam Sharma in New Delhi at ssharma@bloomberg.net.

Last Updated: June 30, 2005 02:37 EDT