India's Economy Expands 8.9%, Slowest Pace This Year

From Bloomberg today:

India's economy grew at the slowest pace since the final quarter of 2006, signaling the central bank may soon end three years of interest-rate increases.

Asia's third-largest economy expanded 8.9 percent in the three months to Sept. 30 from a year earlier, after a 9.3 percent increase in the previous quarter, the statistics office said today in New Delhi. Analysts expected an 8.7 percent gain.

Manufacturing growth was the weakest in seven quarters as higher borrowing costs curbed demand for cars and motorcycles, prompting Tata Motors Ltd. and Hero Honda Motors Ltd. to reduce output. A planned relaxation of foreign-investment rules may attract companies such as Frankfurt airport owner Fraport AG, helping improve India's congested air terminals and shoddy roads.

``Removing bottlenecks is central for India's growth to continue,'' said Maya Bhandari, an economist at Lombard Street Research Ltd. in London. ``India is growing at its potential, its macro fundamentals are solid and you have a situation where companies will put more money there.''

India's benchmark share index gained 1.9 percent to 19363.19 on the Bombay Stock Exchange. The yield on the key 10- year government bond fell 1 basis point to 7.91 percent.

Manufacturing gained 8.6 percent last quarter from a year earlier, easing from a previous increase of 11.9 percent, according to today's report. Electricity output slowed to 7.3 percent from 8.3 percent, while farming rose 3.6 percent after a 3.8 percent gain in the quarter ended June 30.

`Gentle Slowdown'

``The Indian economy is softening but not dramatically so,'' said Robert Prior-Wandesforde, senior economist at HSBC Holdings Plc in Singapore. ``A gentle slowdown is probably exactly what the Reserve Bank of India would like to see.''

The central bank expects growth in the year to March to ease to 8.5 percent after it raised interest rates nine times since 2004. The reverse repurchase rate is now at a five-year high of 6 percent. Inflation was 3.21 percent in the week ending Nov. 17, down from 6.7 percent at the start of 2007.

Higher interest rates have curbed demand for autos and motorcycles, prompting Tata Motors and Hero Honda Motors to delay opening new factories and cut output.

Still, economic expansion in this financial year almost matches the average 8.6 percent growth from 2003, the quickest pace in the nation's history since independence in 1947. That's boosting profits for companies doing business in India.

Coal, Cement

South Africa's Richards Bay Coal Terminal, the world's biggest coal-export facility, expects a 30-fold surge in sales to India this year. Fraport said this month it is aiming to boost activities in ``booming markets'' such as China and India.

With exports accounting for only 23 percent of India's $906 billion economy, Lehman Brothers Inc. expects the South Asian nation to be immune to a deceleration in world growth sparked by mortgage defaults in the U.S.

The International Monetary Fund last month cut its projection for global growth next year to 4.8 percent from an estimate of 5.2 percent in July.

India's pace of growth is almost three times the economic expansion in the U.S. and countries that share the euro, and falls only behind China's 11.5 percent gain last quarter among the world's top 15 economies.

Global producers of cement, steel, copper and other products are benefiting from a five-year $500 billion plan by India's government to modernize and expand roads, ports and other infrastructure.

Foreign Investment

``Despite a slowdown in manufacturing, the sustained rate of investment gives me the confidence that the year will end pretty close to 9 percent growth,'' Indian Finance Minister Palaniappan Chidambaram told reporters in New Delhi. ``With luck, it could even be on the right side of 9 percent.''

The government will next week consider easing foreign investment rules in aircraft maintenance companies, petroleum marketing firms and commodity exchanges, the Economic Times reported. Since assuming office in May 2004, the government has relaxed foreign investments in telecommunications and single- brand retail outlets.

``India is very committed to reforms,'' said Stephen Roach, chairman of Morgan Stanley Asia Ltd. ``I like what I see in India. The Indian economy is really performing very impressively right now.''

Demand in India is also being bolstered by new jobs created by companies such as Cisco Systems and Mahindra & Mahindra Ltd., which are expanding to benefit from local consumer spending.

More Jobs

Cisco Systems Inc., the world's largest maker of computer- networking equipment, plans to triple its workforce in India to 10,000 people by 2010, Chief Executive Officer John Chambers said last month.

Mahindra, India's biggest sport-utility vehicle maker, plans to spend about $1 billion in the next four years to double automobile production.

State Bank of India, the nation's biggest lender, today won government approval for a $4.2 billion share sale, its first in a decade, amid higher demand for mortgage, car and other loans.

The Indian economy has quadrupled in size since 1991, when the Oxford-educated Singh as the finance minister, introduced free-market measures that cut red tape and allowed foreign companies to set up operations locally. That's helped double per capita income in the last eight years.