India economy set for more strong growth

NEW DELHI: India looks set for another year of strong growth after the economy unexpectedly accelerated by a scorching 9.3 percent during the first three months, analysts say.   

Last Friday's first-quarter data, driven by robust manufacturing and services output, surprised many analysts who had forecast growth as low as 8.5 percent after five interest rate hikes in a year.   

The aggressive monetary tightening and a stronger rupee, which has hit exports, means it is unlikely India will repeat last year's torrid 9.4 percent expansion, the fastest in 18 years, analysts say.   

But India's "growth story," which has prompted foreigners to pump billions of dollars into shares, infrastructure and other investments, remains intact.   

Expansion is being "consumption led" with "rising incomes and a growing middle class" in the country of 1.1 billion people, said Deepak Lalwani, director at London investment house Astaire and Partners.   

"The economy has gained its own strong momentum due to cumulative reforms," said Lalwani, who sees growth of 8.5-9.0 percent in the fiscal year to March 2008.   

Agriculture, which has pulled down the broader economy, also fared better than expected during the first quarter, posting 3.8 percent growth.   

While nine percent is at the upper end range of most full-year forecasts, economists have raised their expectations following the quarterly figures.   

JP Morgan boosted its growth estimate from eight to 8.6 percent and Morgan Stanley from 7.7 percent to 7.8 percent. India's HDFC bank said it was looking at "8.5 percent plus" from an earlier 8.3 percent. Other investment houses said they were considering hiking their forecasts.   

Finance Minister P Chidambaram said he was "confident GDP growth will remain close to nine per cent this year" even though first-quarter growth was "a shade below" the 9.6 percent expansion logged in the year-ago period.   

India's economy, which has expanded by an average annual 8.6 percent in the past three years, is the fastest growing after neighbouring China. China's economy expanded by a roaring 11.9 percent in the second quarter.   

Analysts say India's growth would cool in coming quarters as the central bank's tight money policy, which has pushed interest rates to five-year highs, crimps capacity expansion and hurts credit growth.   

Sales of cars are already slowing due to higher loan costs and spending on consumer durables has fallen.   

"There is some softness already in credit growth and rail freight and exports," said Abheek Barua, chief economist at HDFC Bank.

But the central bank is unlikely to ease its hawkish monetary policy stance rapidly.   

Data Friday showed inflation fell to below four percent for the first time in over 15 months to 3.96 percent but the strong first-quarter growth means that fears of overheating are still alive, analysts said.   

"It does not seem likely the central bank will loosen rates in a hurry... (as) the economy continues to grow at an above trend pace," said Manika Premsingh at Edelweiss Capital brokerage.   

The new inflation rate is far below the bank's annual target of "close" to five percent. But economists say the drop was mainly due to a high base effect from a year earlier when inflation stood at 5.6 percent.   

"The bank won't be lulled," said Soumitra Chaudhuri, economic advisor to credit rating agency ICRA.   

"Inflation isn't dead, the economy is growing fast, and if you don't watch inflation it will come back with a vengeance," he said.