Tue, Sep 01, 2009 page11

• Weak monsoon may stall upturn in growth in India

  ‘RECOVERY IMPULSES‘: The central bank may face new inflationary pressures as demand continues for inexpensive credit amid the downturn and poor rainfall

  • BLOOMBERG
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  India’s economic growth accelerated for the first time since 2007, indicating that the global recession’s impact on Asia’s third-largest economy is waning.

  GDP expanded 6.1 percent in the three months to June 30 from a year earlier after a 5.8 percent rise in the previous quarter, the Central Statistical Organization said in New Delhi today. Economists expected a 6.2 percent gain.

  The recovery may stall as a deficient monsoon threatens to reduce farm output in rural areas, where three-fifths of India’s 1.2 billion people live. A growth slowdown coupled with faster inflation caused by higher food and commodity prices would pose a “dilemma” for the central bank on whether to raise borrowing costs, Governor Duvvuri Subbarao said last week.

  “The weak monsoon has complicated the situation for the central bank,” said Saugata Bhattacharya, an economist at Axis Bank Ltd in Mumbai. “Poor rains will hurt growth and stoke inflationary pressures as well.”

  India’s benchmark Sensitive stock index maintained its declines yesterday, dropping 1 percent to 15,755.33 in Mumbai at 11:12am local time. The yield on the key seven-year government bond held at a nine-month high of 7.43 percent, while the rupee was little changed at 48.86 to the greenback.

  Before the rains turned scanty, the Reserve Bank of India on July 28 forecast the economy would grow 6 percent “with an upward bias” in the year to March 31, the weakest pace since 2003. It also raised its inflation forecast to 5 percent from 4 percent by the end of the financial year. The key wholesale price inflation index fell 0.95 percent in the week to Aug. 15.

  The central bank’s Aug. 27 annual report said that withdrawing the cheap money available in the economy would heighten the risk of weakening “recovery impulses,” while sustaining inexpensive credit for too long “can only increase inflation in the future.”

  As the global recession hit India, the central bank injected about 5.6 trillion rupees (US$115 billion) into the economy, which, together with government fiscal stimulus, amounts to more than 12 percent of GDP.

  The Reserve Bank kept borrowing costs unchanged in its last monetary policy statement on July 28 and signaled an end to its deepest round of interest-rate cuts on concern that inflation will “creep up” from next month. The next policy meeting is scheduled for Oct. 27.

  Morgan Stanley economist Chetan Ahya expects the economy to grow between 5.2 percent and 5.8 percent in the year to March 31. That would make India the fastest growing major economy after China, attracting overseas companies including Harley-Davidson Inc, the biggest US motorcycle maker.

  Steel Authority of India Ltd, the nation’s second-largest steelmaker, has said that demand for so-called flat products, mainly used to make automobiles, is rising and has increased prices by 900 rupees, or 3.4 percent, a tonne.
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