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India's Economy Probably Expanded at Fastest Pace Since 2007

India’s economy probably grew at the fastest pace in 2 1/2 years, adding pressure on the central bank to raise interest rates even as the global recovery falters.

Gross domestic product rose 8.8 percent in the three months ended June 30 from a year earlier, according to the median of 27 forecasts in a Bloomberg News survey. The statistics office is scheduled to release the data tomorrow at 11 a.m. in New Delhi.

Exports account for less than a fifth of India’s GDP, and rising wages and consumer spending are sheltering Asia’s third- biggest economy from slowing growth in the U.S., China and Japan. The Reserve Bank of India said last week its priority is to reduce inflation, even after the most aggressive round of monetary policy tightening in the region.

“India’s problem is inflation,” said Samiran Chakraborty, a Mumbai-based economist at Standard Chartered Plc. “The fragility of the recoveries in most developed economies is worrying the global markets but such fears seem to be less pronounced in India due to strong domestic growth.”

India’s $1.3 trillion economy may expand 8.5 percent in the year ending March 31, the most in three years, the central bank estimated on July 27. The benchmark wholesale-price inflation rate has hovered around or above 10 percent since January.

Global Slowdown

By contrast, some of the world’s biggest economies are decelerating, adding to signs that the global recovery may be losing its momentum. Last quarter, economic growth in the U.S. slowed to a 1.6 percent annual rate, China’s expansion eased to 10.3 percent while Japan’s economy grew at less than a fifth of the pace economists estimated.

India’s merchandise exports increased 13.2 percent in July, the slowest pace in six months.

“India is relatively more domestic-demand driven, but still, this is worth noting as it could be a drag on overall growth if the ongoing weakness in global, U.S. and Chinese growth continues,” said Devika Mehndiratta, a Singapore-based economist at Credit Suisse Group AG.

Indian 10-year government bond yields climbed 2 basis points to 7.99 percent at 9:04 a.m. in Mumbai today on concern central bank Governor Duvvuri Subbarao may raise rates for the fifth time since mid-March to slow demand and cool prices. The central bank is scheduled to release its next monetary policy statement on Sept. 16.

Monetary Tightening

Subbarao has increased rates the most number of times among Asian central banks this year. The Reserve Bank’s reverse repurchase rate is 4.5 percent and the repurchase rate is 5.75 percent. Malaysia is second with three rate increases.

Inflation pressures are “coming up sharply” in India while the global economy has moved to a state of “less comfort” and balancing the two risks while setting rates is the challenge, central bank Deputy Governor Subir Gokarn said Aug. 25.

The Bombay Stock Exchange’s Sensitive Index has more than doubled to 18,189.68 since February 2009 as investors bet India’s economy will expand. The rupee has gained 4.2 percent to 46.78 against the dollar in the past year. The stock index gained 1.1 percent in early trading today.

Companies including TVS Motor Co., India’s third-biggest motorcycle maker, are increasing their capacities on optimism sufficient monsoon rains in the June-September season will boost farm production and spur consumer demand. Last year’s rains were the least since 1972.

Rural Demand

About three-fifths of India’s 1.2 billion people live in the countryside and depend on agriculture for their livelihood.

This year’s rains will help yield “bumper” harvests, Farm Minister Sharad Pawar said last month.

“We expect the monsoon rains to have a very positive effect in terms of stronger purchasing power,” Venu Srinivasan, chairman and managing director of TVS Motor, said in an interview in New Delhi on Aug. 23. TVS Motor plans to spend about 2 billion rupees ($42.6 million) to add capacity in the year ending March 31.

Salaries in India may grow an average 10.6 percent in 2010, the fastest pace in the Asia-Pacific, after increasing 6.6 percent in the previous year, according to the Lincolnshire, Illinois-based human resources adviser, Hewitt Associates Inc.

Car Shortage

Indians’ increasing wealth is causing shortages in the automobile industry, with Volkswagen AG and Hyundai Motor Co. introducing waiting lists for the first time in more than a decade amid a lack of engine castings and batteries after local component suppliers failed to anticipate a surge of more than 30 percent in car sales in the country this year.

Industrial output, which accounts for about a quarter of India’s economy, jumped 11.6 percent in the three months through June compared with 3.9 percent in the same period the previous year.

“While we are proud of our economic growth, as indeed we should be, controlling price-rise remains our top priority,” Sonia Gandhi, leader of the ruling Congress party, told her lawmakers on Aug. 19, underscoring the challenge facing the South Asian nation.

Inflation dominated the first two weeks of Parliament’s monsoon session that started on July 26, with opposition parties criticizing Prime Minister Manmohan Singh’s government for failing to check prices.

“Controlling inflation is the biggest test for policy makers,” said Jay Shankar, chief economist at Religare Capital Markets Ltd. in Mumbai. He expects rates to be raised by as much as a percentage point by March 31.

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net

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