Growth May Surpass Government Target for Year, Ushering Higher India Rates

India’s economy is likely to surpass the government’s 8.5 percent growth target for the fiscal year, forcing the central bank to resume interest-rate increases as domestic demand offsets [bn:WBTKR=INQGGDPY:IND] risks from abroad.

Gross domestic product [] climbed 8.9 percent for a second straight quarter in July to September, a government report showed yesterday, with the gains propelled by the manufacturing and services industries. Kaushik Basu, chief economic adviser to the finance ministry, said after the data release that India could achieve a 9 percent growth rate sooner than expected.

India’s expansion bucked a growth slowdown in Asian neighbors from Thailand to Malaysia, where currency appreciation and risks to exports from Europe’s debt crisis and U.S. unemployment have clouded the outlook. Without higher borrowing costs, India risks reigniting inflation stoked by rising commodity prices, expanding credit and strengthening consumer demand for products such as Maruti Suzuki India Ltd.’s cars.

“There will be a strain on the infrastructure, which in turn will create more pressure on inflation,” said Sajjid Chinoy, a Mumbai-based economist with JPMorgan Chase & Co. He predicted that central bank Governor Duvvuri Subbarao will raise interest rates by a quarter of a percentage point in January.

Chinoy, who previously worked at the International Monetary Fund, said that India’s challenge will be to boost private investment and expand the nation’s capacity in industries such as power generation.

Irregular Roads

The finance ministry estimates that India produces about 10 percent less electricity than it needs, and roads, used to transport about 65 percent of the nation’s cargo, are plagued by single lanes and irregular surfaces.

The $1.3 trillion economy is likely to expand 8.5 percent in the fiscal year through March, the most in three years, Prime Minister Manmohan Singh said Nov. 20. Finance Minister Pranab Mukherjee said yesterday the pace may exceed that target.

India’s factory output in November grew at the fastest pace in six months, according to the Purchasing Managers’ Index compiled by HSBC Holdings Plc and Markit Economics, rising 58.4, the highest since May this year. Exports in October grew 21.3 percent to $17.9 billion, a separate report showed.

Rising car sales and expanding bank credit provide evidence of growing consumer demand in Asia’s third-biggest economy.

Maruti Suzuki, India’s biggest carmaker, Tata Motors Ltd. and others sold a record 182,992 cars in October, according to the Society of Indian Automobile Manufacturers. Loans given by lenders such as State Bank of India Ltd. and rivals rose 22 percent in the fortnight to Nov. 5 from a year earlier, the fastest pace since January 2009.

Stocks Rise

The Bombay Stock Exchange’s Sensitive Index, or Sensex, rose 1.4 percent to 19,793.07 today at 3:04 p.m. amid expectations higher growth will boost company’s earnings.

India’s GDP gain last quarter compares with an expansion of 1.9 percent in the 16-nation Euro area and 2.5 percent in the U.S. In China growth cooled to 9.6 percent in the same period. Australia’s economy grew 0.2 percent from the second quarter, the worst performance since a contraction at the end of 2008.

ING Groep NV raised its growth forecast for India to 8.7 percent from 8.4 percent after yesterday’s announcement. Goldman Sachs Group Inc. and Morgan Stanley said there are upside risks to their 8.5 percent growth forecast.

Growth Trajectory

China’s yuan has gained 2.4 percent against the dollar this year, more than the Indian rupee’s 1.8 percent, which is also less than the Thai baht’s 10.7 percent increase and the Malaysian ringgit’s 8.3 percent jump. The smaller appreciation in India’s currency may have prevented a bigger moderation in the country’s inflation via lower import costs.

India’s wholesale-price inflation rate was 8.58 percent in October, compared with the “ideal” level of 4 percent to 5 percent, according to Finance Minister Mukherjee. Consumer prices are rising at a pace near 10 percent, the fastest in the Group of 20 nations after Argentina. In contrast, Thailand’s consumer-price gains slowed to 2.8 percent in October.

“The pressure on inflation is still significantly high,” said Sailesh Jha, chief Asia strategist at Jefferies Singapore Ltd., who expects rate increases in December and January. “India’s trajectory of growth is likely to be in the range of 9 percent to 9.5 percent over the next several years, which means that the pressure on infrastructure will accelerate.”

Corruption

Rising cases of corruption including the arrest of eight bankers and brokers in a loan and bribery probe, have also stymied Singh’s efforts to accelerate rule changes to quicken growth as opposition parties clamor for deeper investigations and disrupt Parliament.

Singh’s opponents have also called for a separate investigation into the alleged sale of phone licenses at below- market rates.

“The recent spate of high-profile graft,” cases have again focused attention on the growing governance problems in India, said Vishnu Varathan, a Singapore-based economist at Capital Economics Ltd.

Strategists are cutting forecasts for an appreciation in India’s rupee, Asia’s worst-performing currency last month, as capital flows to emerging markets slow because of the worsening debt crisis in Europe.

The currency slid 3.3 percent, the most since May, and touched a 10-week low of 46.125 yesterday, prompting banks including Wells Fargo & Co. and Credit Agricole SA to concede their predictions were too bullish. The currency gained 0.7 percent to 45.5575 to a dollar at 2:33 p.m. in Mumbai.

The Reserve Bank of India has increased borrowing costs six times this year. Ten of 15 economists surveyed by Bloomberg News yesterday expect the central bank to raise rates by the end of March, while the rest predict no change for the period.

Governor Subbarao on Nov. 2 raised the benchmark repurchase rate and the reverse repurchase rate by a quarter-point each to 6.25 percent and 5.25 percent, saying inflation continues to hold above the “comfort zone.”

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

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.