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India Growth Beats Estimates After Rate Cut to Aid Spending

India’s economy grew more than estimated last quarter after the central bank cut interest rates to support spending at home as Europe’s debt crisis crimped export growth. Bonds fell and the rupee pared losses.

Gross domestic product rose 5.5 percent in the three months through June from a year earlier, faster than the three-year low of 5.3 percent in the previous quarter, data from the Central Statistical Office in New Delhi showed today. The median of 39 estimates in a Bloomberg News survey was for a 5.2 percent gain.

“Despite slightly higher growth, the underlying momentum remains weak,” said Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai. “India needs a faster expansion to cut poverty and accelerate development, but its economic performance is likely to remain below potential.”

Prime Minister Manmohan Singh faces pressure to rejuvenate a development agenda hampered by graft allegations and political gridlock, as inflation near 7 percent limits the central bank’s room to lower rates further to revive investment. India and BRIC peers China, Russia and Brazil are relying on domestic demand as Europe’s woes dim the outlook for overseas sales.

Inflation has been fanned by food costs and a 17 percent drop in the rupee against the dollar in the past year that made imports such as oil costlier. A below-average monsoon threatens to exacerbate price increases and weigh on growth by crimping farm output.

Rupee, Stocks

The yield on the 8.15 percent bond due June 2022 rose to 8.23 percent as of 3:19 p.m. in Mumbai from 8.19 percent yesterday. The rupee little changed at 55.655 per dollar, after sliding as much as 0.3 percent earlier. The BSE India Sensitive Index fell 0.8 percent.

GDP rose 3.9 percent last quarter from a year earlier, the slowest pace since 2009, based on an alternative estimate using expenditures on goods and services, according to calculations by Bloomberg.

India’s wholesale-price index rose 6.87 percent last month from a year earlier, the fastest inflation in the BRIC group even as the pace eased to a 32-month low. India also faces record borrowing needs to plug the widest BRIC budget deficit and a trade shortfall that has pressured the rupee.

The nation is “somewhat of an outlier in the world” as inflation remains above a comfort level of about 5 percent even as GDP growth moderates, according to Reserve Bank of India Governor Duvvuri Subbarao. He left borrowing costs unchanged at 8 percent in July for a second meeting, after a 0.5 percentage point cut on April 17.

Faster Development

Brazil lowered its lending rate for the ninth straight meeting this week to a record low 7.5 percent. The nation’s GDP growth probably slowed to 0.7 percent in the second quarter from a year earlier, the weakest pace since 2009, according to the median estimate in a Bloomberg News survey before a report today.

India’s central bank predicts a 6.5 percent GDP climb in the 12 months that began April 1, matching last year’s pace, which was a nine-year low following a moderation in investment.

“Today’s growth rate was driven by the construction sector and other services,” said Suvodeep Rakshit, an economist at Kotak Securities Ltd. in Mumbai. “But the weak growth story still continues. The Reserve Bank of India’s priority remains inflation, so the onus is on the government to accelerate reforms.”

Farm output rose 2.9 percent in the three months through June from a year earlier, compared with a 1.7 percent gain in the previous quarter, today’s report showed. Manufacturing expanded 0.2 percent, while construction jumped 10.9 percent.

Budget Deficit

Singh is under pressure to achieve faster growth in a nation where the majority of people live on less than $2 per day, according to World Bank estimates.

The Reserve Bank has cited India’s fiscal gap as among inflation risks. Singh’s administration is struggling to rein in spending on a subsidy program ranging from diesel to fertilizers even as weaker expansion crimps tax revenues.

The government’s goal is to narrow the budget shortfall to 5.1 percent of GDP in the fiscal year through March 2013, from 5.8 percent. Forecasters including Citigroup Inc. predict the deficit will instead widen as expansion falters.

S&P and Fitch have said they may strip India of its investment-grade rating because of such risks. Companies such as Tata Motors Ltd. (TTMT) have felt the impact of slower growth. Deliveries from its Indian business declined 3.6 percent in the three months ended June.

Finance Minister Palaniappan Chidambaram has pledged to unveil a road map for fiscal consolidation to assuage concern that policy missteps are clouding India’s outlook.

The government has forgone increased foreign investment in industries from retailing to insurance in recent months, in part as coalition allies objected. Legislation to revamp taxes to bolster expansion is also stalled.

“The government has its back to the wall,” said N. Bhaskara Rao, chairman of the New Delhi-based Centre for Media Studies. “There is little possibility of it hitting back and taking any meaningful reforms.”

To contact the reporter on this story: Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net; Kartik Goyal in New Delhi at kgoyal@bloomberg.net;

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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