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

India's economy grew last quarter at the slowest pace since 2006, signaling the central bank may soon end three years of inflation-fighting 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.

Slower growth may not deter Cisco Systems Inc., Holcim Ltd. and other companies from investing in India, still the world's second-fastest-growing economy after China. Prime Minister Manmohan Singh's government is due next week to consider plans to further relax foreign-investment rules, as part of efforts to improve the nation's congested airports and dilapidated 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.

The Reserve Bank of India expects growth in the year to March to ease to 8.5 percent after it raised interest rates nine times since 2004 to curb consumer-price gains. Inflation was 3.01 percent in the week ending Nov. 10.

Manufacturing gained 8.6 percent last quarter from a year earlier, easing from a previous increase of 11.9 percent. 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.

Cars, Motorbikes

Higher interest rates have curbed demand for cars and motorbikes, prompting Tata Motors Ltd. and Hero Honda Motors Ltd. to delay opening new factories and cut output. Demand for paper may wane from next year, said Gautam Thapar, chairman of Ballarpur Industries Ltd., India's biggest maker of writing and printing paper.

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

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. Holcim Ltd., the world's second-largest cement maker, said this month that its third-quarter profit rose 28 percent as plants in India and China ran at full capacity.

Credit Crunch

This trend will continue because of all the work on infrastructure, said Jerome Lombardi, a business development manager at Holcim Group Support (S) Pte Ltd. in Singapore. When there is a global crisis we would rely on countries like India and China to sustain our growth.

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 and warned that even its new prediction may be too optimistic given threats posed by the sell-off in credit markets.

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.

Foreign Investment

Global producers of cement, steel, aluminum, copper and other products are benefiting from an unprecedented drive by India to modernize and expand roads, ports and other infrastructure. Singh's government aims to attract $500 billion by 2012 in India's infrastructure.

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.

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.

Cisco, 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. Cisco, International Business Machines Corp. and others are recruiting more in India where pay scales are a fifth of those in western economies.

Less Red Tape

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

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.

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.

Source - Bloomberg