India’s economy grew more than economists estimated last quarter, adding to evidence of a strengthening in domestic demand that’s stoked inflation by placing strains on the nation’s transport and power systems.
In the first quarter of 2010, the Indian economy, the third economy in Asia, was up by 8, 6%. The second quarter’s growth, which is calculated starting with April and ending in June, is believed to be due to a robust growth in the manufacturing department.
However, there still are some sectors in which the economy of India is sore. The financial sector, for example, recorded a 6% growth rate during the timespan of April 2009 and June 2010.
Improved infrastructure will prove critical to sustaining India’s expansion rate, Prime Minister Manmohan Singh said this month as inflation runs almost double what the government regards as “ideal.” The Reserve Bank of India may need to resume raising interest rates in the coming months after lifting borrowing costs six times this year.
The 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 Pranab Mukherjee. Consumer prices are rising at a pace near 10 percent, the fastest in the Group of 20 nations after Argentina.
India’s GDP gain last quarter compares with an expansion of 1.9 percent in the 16-nation Euro area, 2.5 percent in the U.S. and 9.6 percent in China. The Organization for Economic Cooperation and Development on Nov. 18 said high levels of unemployment in the U.S., Europe’s sovereign-debt crisis and growing trade imbalances around the world pose risks to the global recovery.
Faster growth is boosting revenue for Prime Minister Singh’s government, giving him room to cut the budget deficit to a targeted 5.5 percent of GDP from a 16-year high of 6.9 percent last year, even as spending on oil and fertilizer subsidies rises. Officials sought parliament’s approval on Nov. 15 to spend an extra 50 billion rupees ($1 billion) on fertilizer subsidies after seeking 140 billion rupees more to cap oil prices in August.
The Yield on the 10-year government bond rose five basis points to 8.07 percent, the most in more than a month, at 5 p.m. close in Mumbai, according to the central bank’s trading system. The Bombay Stock Exchange’s Sensitive Index, or Sensex, gained 0.6 percent to 19,521.25.
In the meantime, concern that political turmoil will impede legislative work has countered the effect of the RBI’s 1.5 percentage points of rate increases on the rupee, reducing its gains for the year against the dollar to about 1.4 percent.
Federal investigators arrested eight Indian bankers and brokers on Nov. 24 amid allegations of improper loan disbursals.
The construction sector, grew by 7, 5%, this year, compared to 4, 6%, last year.
The last time the Indian economy grew at such a fast rate, was in the first quarter of 2007, when it expanded by an impressive 9, 7%.
The Reserve Bank of India’s benchmark repurchase rate is 6.25 percent. By comparison, the U.S. Federal Reserve’s target for overnight interbank loans is zero to 0.25 percent, where it has been since December 2008.
The rate differential between India and advanced countries spurred an unprecedented $10 billion inflow into rupee debt this year. Overseas funds also invested a record $28.5 billion in Indian stocks on prospects of faster economic expansion in the South Asian nation.
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 Singh said Nov. 20. Finance Minister Mukherjee said economic growth may exceed that target after today’s release, while Kaushik Basu, chief economic adviser in the ministry of finance, said India could achieve 9 percent growth sooner than expected.
The financial, insurance and real-estate services, expanded by just 8%, compared to the strong growth rate of 11,8% recorded last year, in the same period. The community social services and personal services growth slowed down to 6.7 per cent, against 7.6 per cent a year ago. However, trade, hotels and communication services rose by 12.2 per cent, against 5.5 per cent during April-June 2009.
Rising car sales and expanding bank credit provide evidence of growing consumer demand in Asia’s third-biggest economy.
Given the strong demand, high and sticky inflation levels, “we think the RBI will raise rates by another 25 basis points in its policy meeting in January,” said Indranil Pan, chief economist at Kotak Mahindra Bank Ltd. in Mumbai.
Farm output grew 4.4 percent in the three months through September, compared with a 2.5 percent gain in the previous quarter, today’s report showed. Mining grew 8 percent, manufacturing gained 9.8 percent, while construction rose 8.8 percent.
Exports account for less than a fifth of India’s GDP and wage growth and consumer spending have protected the economy slowdown affecting advanced economies.
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