New Delhi: India’s economy grew at its fastest rate in 18 months in the quarter through September, smashing expectations and adding pressure to bring forward an interest rate rise and cut stimulus spending as inflation mounts.
Asia’s third-largest economy grew 7.9% in the past quarter from a year earlier, far above forecasts of 6.3%, but growth was expected to slow this quarter when the impact of a weak monsoon would be seen on crops.
The expansion was driven by government spending, manufacturing, services, and a better-than-forecast farming output, sending bond yields and swap rates higher as investors bet on a rise in rates and the finance minister said growth could hit 7% in the fiscal year ending in March 2010.
“This data could be a green light for the Reserve Bank of India to hike rates, and there are greater chances of this by end of the calendar year,” said Robert Prior-Wandesforde, senior Asia economist at HSBC in Singapore.
“The exit from the fiscal stimulus by the government may also be earlier post the GDP data.”
Prior to the data, most economists had predicted a rate rise sometime between January and April 2010.
In the June quarter, India’s economy grew 6.1% from a year earlier, and Prior-Wandesforde said that by his calculation the last quarter’s growth was the sharpest on a quarter-by-quarter basis since quarterly data began in 1996.
Manufacturing output grew 9.2% in the quarter as consumers bought more cars and other goods.
Larger neighbour China, which along with India is helping to pull the global economy out of its worst recession in decades, clocked growth of 8.9% during the same quarter.
The yield on the 10-year bond rose 3 basis points, swap rates moved up by 5 to 7 basis points and the rupee rose. The Sensex share index extended gains to more than 2%, though still lagged the nearly 3% gain in the MSCI Index of Asia ex-Japan shares .
Inflation, farming in focus
India’s annual wholesale price inflation was a benign 1.34% in October, but economists have said it could rise to as much as 8% by the end of the fiscal year -- above the central bank’s perceived comfort zone around 5%.
Food prices jumped 15.6% in the year to mid-November, although supply-side inflation is largely beyond the purview of monetary policy.
High food prices are sensitive in a country that remains mostly rural and poor, complicating government efforts to implement pro-market financial sector reforms.
On Monday, opposition party workers burned buses and shut down businesses in the eastern city of Kolkata to enforce a 12-hour strike to protest rising food prices.
Agriculture, which accounts for roughly 17% of India’s economy, remains a wild card after farm output grew 0.9% during the quarter, beating expectations for a decline.
RBI deputy governor Subir Gokarn said he would not be surprised if growth slowed in the December quarter.
“While it is a recovery and it seems to be gaining strength, we should not ignore the fact that it is still being driven substantially by public spending,” he told reporters.
Rajeev Malik, economist at Macquarie in Singapore, stuck with his view that the central bank would use liquidity management rather than rate rises in December and January as farming output was likely to fall.
“I don’t think they are going to be swung by what agriculture has done,” he said.
On the plus side, long-running declines in exports and credit growth are poised to reverse in coming months as the global economy shows signs of recovery.
Nomura lifted its growth forecast for the Indian economy in 2009-10 to 7% from 6% following Monday’s data.
A top government official played down inflation concerns.
“I don’t believe there are serious worries on inflation except food prices. Food prices are a matter of concern, but I don’t think conventional monetary policy will take care of that problem,” said Montek Singh Ahluwalia, deputy chairman of India’s Planning Commission.
He also reiterated the government stance that stimulus would remain in place.
“Personally, I don’t think the second quarter numbers suggest any change in the (fiscal) policy in the current year,” he said.
In the 2008-09 fiscal year, India’s economy grew 6.7%, its weakest in six years and well below rates of 9% or more in the previous three years.
The central bank cut its key lending rate by 425 basis points between October 2008 and April. Late last month it began scaling back its monetary stimulus by removing some of the liquidity support measures implemented to help India weather the global downturn.
Economists polled by Reuters poll at the time were divided over when the central bank would begin to raise interest rates, but all saw rates rising by the end of April. The central bank will hold monetary policy review meetings in January and April, but can adjust rates at any time.
Consumers’ share of spending in the Indian economy totalled 53.5% in July-September, little changed from a year earlier, while the government’s share rose to 10.6% from 8.7% on the back of stimulus spending, Monday’s data showed.