Indian economy grows 8.9 percent
- India's economy grew at 8.9 percent in the second quarter
- Growth faster than the previous three months of brisk gains
(FT) -- India's economy grew at 8.9 percent in the second quarter, an acceleration from the brisk growth rate posted for the previous three months.
The figures, released on Tuesday, surpassed analysts' expectations that the economy would fall short of the 8.8 percent year-on-year growth it recorded in the April to June quarter.
Manmohan Singh, India's prime minister, has forecast that the economy will expand 8.5 percent this year, after growing 7.4 percent last year, despite a severe drought that hit farm production and contributed to sky-rocketing food prices.
The prime minister predicts that an economy propelled by buoyant domestic demand has the capacity to climb towards 10 percent growth in the coming two years to rival Chinese rates of growth.
Rajeev Malik, economist at CLSA, said that growth had become "sacred" in India and that the government's challenge was to keep a steady momentum and avoid at all costs any shocks to growth.
A Reuters poll had recorded predictions ranging from 7.2 percent to 9 percent for the latest quarter.
Confirmation of the fast-growing output in Asia's third largest economy by India's statistical office will offer temporary respite to the Congress party-led government, which is currently beset by a number of damaging corruption scandals. These have exposed an unhealthy interaction between business and government that is widely suspected but rarely put on public display.
The government has strongly appealed to India's voters with the mantra of "inclusive growth", which aims to share the high rates of growth recorded in the country's industrial hubs and large cities with the poorer areas.
But recent revelations of alleged crony capitalism among key ministries and big business threaten to erode public confidence in the state and its institutions.
India's strong economic growth comes against a background of tightening monetary policy as the Reserve Bank of India tries to encourage growth while fighting stubbornly high inflation.
The central bank has steadily raised interest rates over the past year, unwinding an ultra-loose policy stance adopted to combat the effects of the global financial crisis.
The RBI is expected to pause until the first quarter of next year, when another 25 basis points rise in the repo rate, the rate at which the central bank lends to commercial banks, is likely.
Rohini Malkani, economist at Citigroup, said India's growth had now bounced back to near pre-financial crisis levels. However, she cautioned that inflation remained a worry as rising incomes, changing diets and low productivity continued to put pressure on agricultural commodities. She also said increased fuel costs in a country still heavily dependent on imported oil could also lead to rising prices.
Another concern is the paucity of foreign direct investment at a time of increased short term capital inflows from the west.
"While capital flows are likely to be more than sufficient, a key concern is the composition of flows. Recent trends indicate a deceleration in FDI. This is a concern," Ms Malkani said.
Earlier this month, Duvvuri Subbarao, the governor of the RBI warned on the FT's beyondbrics blog that India needed a "quantum step" in investment if it was to reach its goal of double digit growth.
Infrastructure is identified by many policymakers as the key sector for investment, but some global business leaders, notably Jeff Immelt, the head General Electric, have complained about an inability to execute projects that has left India badly trailing China.
India has recorded a sharp 18.8 percent drop in its foreign direct investment inflows, to $10.78bn, during the first six months of 2010.
© The Financial Times Limited 2010
http://edition.cnn.com/2010/BUSINESS/11/30/india.economy.gdp.ft/index.html?hpt=Sbin
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