India Growth Quickens From Four-Year Low as Rate Increases Loom

Indian economic growth quickened last quarter from a four-year low on higher factory output, a revival threatened by looming interest-rate increases to fight rising prices in the nation of 1.2 billion people.

Gross domestic product rose 4.8 percent in the three months ended September from a year earlier, compared with 4.4 in the previous quarter, the Statistics Ministry said in New Delhi yesterday. The median of 44 estimates in a Bloomberg News Survey was for a 4.6 percent gain.

“The down trend has been arrested, but a meaningful recovery is still some distance away,” said Radhika Rao, an economist at DBS Bank Ltd. in Singapore. “The outlook is cautious because fiscal rationalization is on the horizon and monetary policy will remain tight.”

Asia’s third-largest economy has struggled to take off as the central bank boosts interest rates to curb inflation and pressure grows on Prime Minister Manmohan Singh to cut spending to meet a budget-deficit target. The rupee’s 12 percent fall against the dollar this year has boosted exports in recent months, shielding factories from slower demand in a country where some 825 million people live on less than $2 a day.

“The recovery will be gradual and tentative,” Vishnu Varathan, a senior economist at Mizuho Bank Ltd. in Singapore, said before the report. “The overall tighter financing position will take a bit of a toll.”

Rate Increases

The central bank will raise the benchmark repurchase rate by quarter of a percentage point by March, Varathan said, reflecting a view shared by ICICI Securities Primary Dealership Ltd. and DBS Bank.

Private consumption growth accelerated to 2.2 percent in the last quarter from a year earlier, from a 1.6 percent pace in the previous three-month period, yesterday’s report showed. Government spending contracted 1.1 percent, while investment jumped 2.6 percent.

The rupee weakened 0.1 percent yesterday to 62.4487 per dollar while the S&P BSE Sensex share index rose 1.3 percent. The yield on the government bond maturing in November 2023 rose to 8.74 percent from 8.72 percent on Nov. 28.

Growth eased in the first half of the fiscal year that started on April 1 in part because of global factors out of the government’s control, Chakravarthy Rangarajan, chairman of Singh’s Economic Advisory Council, told a conference in New Delhi yesterday. India’s expansion has lagged behind regional rivals from China to Indonesia, and the South Asian nation’s companies are grappling with conditions akin to stagflation.

Factory Output

“I am optimistic that the second half will be spurred along by increased manufacturing, leading to a more stable rupee,” Rangarajan said. China grew 7.8 percent last quarter and Indonesia 5.6 percent.

Factory output climbed 2 percent in September, the Statistics Ministry said this month, less than the median estimate of 3.5 percent in a Bloomberg survey. Sales growth dropped to a four-year low at Indian conglomerate ITC Ltd., partly as profit at the hotels business fell.

Reserve Bank of India Governor Raghuram Rajan is expected to raise the policy interest rate to 8.5 percent next year from 7.75 percent, Goldman Sachs Group Inc. said on Nov. 21, building upon two increases of a combined 50 basis points after he moved to the central bank in September.

‘Unenviable Task’

The central bank faces the “unenviable task” of controlling inflation while boosting an economy that grew at the slowest pace since 2003 in the last fiscal year, the RBI said in an economic review last month.

Finance Minister Palaniappan Chidambaram, who has repeatedly said he’ll stick to deficit targets, will reduce planned outlays on items such as roads, ports and welfare programs by about 700 billion rupees ($11 billion) this fiscal year, according to Yes Bank Ltd. Chidambaram has pledged to narrow the deficit to a six-year low of 4.8 percent of GDP in the 12 months ending March 31.

India’s credit rating may be cut to junk next year unless the general election leads to a government capable of reviving economic expansion, Standard & Poor’s said earlier this month.

The central bank under Rajan, a former International Monetary Fund chief economist, has offered concessional dollar swaps to banks to spur inflows of the U.S. currency and bolster the rupee. The currency has appreciated about 10 percent since slumping to a record low in August.

Fastest Inflation

Graft scandals and budget and trade deficits have made it harder for Singh to ease supply bottlenecks that are contributing to consumer-price inflation of 10 percent, the fastest in a basket of 17 Asia-Pacific economies tracked by Bloomberg.

Singh began a policy overhaul in September 2012 to spur growth. Steps have included gradual increases in diesel prices aimed at containing subsidies, and lifting curbs on foreign investment in the retail and aviation sectors to attract capital flows.

Opinion polls signal neither his Congress Party nor the main opposition Bharatiya Janata Party, whose campaign is led by Gujarat Chief Minister Narendra Modi, will get a majority in the general election.

“Clearly the investment cycle has not picked up and it is uncertain whether it will happen before elections,” Prasanna Ananthasubramanian, a Mumbai-based economist at ICICI Securities Primary Dealership, said before the report.

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