India Predicts Growth at Decade Low as Investment Slows

India forecast the weakest economic growth in a decade as subdued investment and elevated inflation add pressure on Prime Minister Manmohan Singh to extend policy changes and revive his development agenda.

Gross domestic product will rise 5 percent in the 12 months through March 2013, below last year’s 6.2 percent and the least since 4 percent in 2002-2003, a Central Statistical Office statement showed in New Delhi today. The median of 34 estimates in a Bloomberg News survey was 5.5 percent.

India faces inflation of more than 7 percent, one of the fastest levels in major emerging nations, limiting the extent the central bank can cut interest rates to spur expansion. The government has vowed spending curbs to damp price gains as it prepares to unveil the annual budget, part of a wider policy overhaul since September to lure capital inflows and ease bottlenecks by speeding up infrastructure projects.

“The government will need to maintain momentum on more measures to boost growth,” Vishnu Varathan, an economist at Mizuho Corporate Bank Ltd. in Singapore, said before the report. India faces a “pretty measured and modest recovery,” he said.

The rupee is up about 4 percent against the dollar since the policy changes began Sept. 13, while the BSE India Sensitive Index has risen 9 percent. The currency weakened 0.1 percent to 53.195 per dollar as of 11:16 a.m. in Mumbai, while the stock index declined 0.1 percent. The yield on the 10-year government bond maturing June 2022 dropped to 7.89 percent from 7.91 percent yesterday.

Policy Changes

The government has opened industries including retail and aviation to more foreign participation, and aims to loosen limits on investment into the pensions and insurance industries.

It has also set up a panel to accelerate stalled road, port and power projects, eased caps on capital inflows and allowed higher diesel tariffs to curb fuel subsidies.

Finance Minister Palaniappan Chidambaram, who is due to present the budget on Feb. 28, has pledged to contain the fiscal deficit at 5.3 percent of GDP in 2012-2013 and pare it to 4.8 percent the following year.

The Reserve Bank of India lowered rates to 7.75 percent from 8 percent last month, the first reduction since April. At the same time, Governor Duvvuri Subbarao signaled there’s limited space for further easing because of lingering price pressures and risks such as a record current-account deficit.

Inflation, based on wholesale prices, decelerated to a three-year low of 7.18 percent in December. Consumer prices rose 10.56 percent in December from a year earlier, the fastest in the BRIC group, which also includes Brazil, Russia and China.

Twin Deficits

Singh, facing a general election by May 2014, snapped two years of policy paralysis with the changes beginning September. Allegations of graft against officials contributed to the earlier logjam and deterred spending on infrastructure.

The government is trying to narrow budget and trade deficits to avert a credit-rating downgrade. The current-account gap was an unprecedented $22.31 billion in the quarter ended Sept. 30.

Companies such as motorcycle maker Hero MotoCorp Ltd. have reported declining profits, while higher costs led mobile-phone operator Bharti Airtel Ltd. to increase prices in January.

The International Monetary Fund yesterday predicted 6 percent Indian GDP growth in 2013-2014. It flagged declining corporate and infrastructure investment and said borrowing costs should be left unchanged until inflation is contained. The lender also said that while India’s expansion remains one of the highest in the world, risks are on the downside.

The IMF’s forecast compares with average expansion of about 8 percent in the past decade. More than two-thirds of India’s population live on less than $2 per day, according to World Bank data, adding pressure for faster development.

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