India’s GDP Growth Beats Estimates Amid Global Slump (Update2)
By Cherian Thomas
May 29 (Bloomberg) -- India’s economy grew more than estimated in the last quarter, making it easier for re-elected Prime Minister Manmohan Singh to steer the country through the global recession.
Asia’s third-largest economy expanded 5.8 percent in the three months to March 31, led by government spending and construction, the statistics office said in New Delhi today. Economists were expecting a 5 percent increase.
Stocks and the rupee climbed on investor optimism that interest-rate cuts and fiscal stimulus worth 7 percent of gross domestic product have helped shield India from the worldwide economic slump. Finance Minister Pranab Mukherjee pledged this week to boost outlays on new roads, ports and other infrastructure even further in July’s budget.
“This pace of growth is not enough to create jobs for all,” said Shubhada M. Rao, chief economist at Mumbai-based Yes Bank Ltd. “A lot needs to be done, especially higher spending in the budget. How it gets financed is the key question.”
The yield on benchmark bonds has climbed 28 basis points to 6.7 percent since Singh’s May 16 electoral triumph, on concern the government will borrow more to fund its budget.
The key Sensitive stock index has surged 20 percent in the period on optimism a coalition without communist parties will allow Singh to sell state assets and accept more foreign investments in insurance and banking. Today it advanced 2.6 percent to 14,673.74. The rupee strengthened to 47.39 a dollar immediately after the report, from 47.46 earlier.
‘Worst is Over’
India’s better-than-expected growth in the March quarter, which matched the pace of expansion in the previous three months, is another sign that the worst may be over for the global economy. Japan’s industrial output surged the most in 56 years in April and U.K. consumer confidence this month matched the highest level in almost a year.
“The worst is certainly over for the Indian economy,” said K. Sridharan, chief financial officer at Ashok Leyland Ltd., the country’s second-biggest maker of buses and trucks.
Vehicle sales and the production of cement, electricity and refined petroleum are showing signs of revival. India’s passenger-car sales increased 4.2 percent in April from a year earlier, after a 1 percent gain in March. Cement production jumped 10.1 percent in March and electricity output rose 5.9 percent from a year ago, according to government data.
Asset Sales
In the past week, UBS AG increased its growth forecast for India to 6.2 percent in the year to March 2010, compared with an earlier prediction of 5.2 percent. Standard Chartered Bank economist Anubhuti Sahay said risks to the bank’s 5 percent forecast for the same period were now “to the upside” and Morgan Stanley’s Chetan Ahya raised his estimate to 5.8 percent from 4.4 percent.
For Mukherjee, the sale of stakes in state-run companies such as National Hydroelectric Power Corp. and Oil India Ltd. is vital to finance spending without widening a budget deficit that Moody’s Investors Service says has “deteriorated.”
India’s budget shortfall stood at 6 percent of GDP in the year ended March 31, more than double the government’s target. Moody’s has kept India’s local-currency long-term rating at Ba2, two levels below investment grade, while Standard & Poor’s has a BBB- rating on India, the lowest investment grade.
“The unexpected election outcome provides scope for rationalizing spending, pushing ahead with disinvestments and key reforms,” Moody’s said in its annual report yesterday.
Reduce Poverty
Mukherjee may have to spend more and provide more tax cuts to bolster manufacturing, which fell 1.4 percent last quarter. Mining output growth slowed to 1.6 percent in the three months to March 31 from 4.9 percent in the previous quarter, today’s report showed.
Manufacturing companies are key employers in India, where almost 10 million people join the workforce each year. The International Labour Organization says India needs at least 10 percent economic growth each year to achieve a 1 percent increase in employment.
The 73-year-old Mukherjee returned to the finance ministry after a quarter of a century. As the finance minister in Indira Gandhi’s cabinet from 1982 to 1984, he ran an economy that was almost closed and insulated from the global economy.
Singh, as finance minister between 1991 and 1996, abandoned Soviet-style state planning and introduced free-market policies that have helped the economy quadruple to $1.2 trillion. Mukherjee said this week he will draft the budget with Singh, renewing a relationship that started in the early 1980s when he appointed Singh as the central bank governor.
Foreign Investment
At stake in Singh’s second term are economic changes blocked by the prime minister’s erstwhile communist partners such as a bill to raise the foreign investment ceiling for Prudential Plc and other insurers to 49 percent from 26 percent, and other proposed legislation aimed at removing a 10 percent cap on the voting rights of foreign investors in non-state banks. The government also wants to allow global retailers such as Wal- Mart Stores Inc. into India.
“The future looks promising in India,” said Fumio Ito, president of Kuraray Co., the Tokyo-based chemicals maker, which this week announced the opening of its marketing unit in India. “When our operations expand, we will consider building a production plant in India.”
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