India's Economy Probably Grew at Slowest Pace in 2 1/2 Years

India’s economy probably grew last quarter at the slowest pace in 2 1/2 years as the highest interest rates since 2002 restrained consumer spending.

Asia’s third-largest economy expanded 8.1 percent in the three months to March 31 from a year earlier, less than the previous quarter’s 8.4 percent gain, according to the median forecast of 20 analysts in a Bloomberg News survey. The figures are due tomorrow around noon in New Delhi.

Reserve Bank of India Governor Yaga Venugopal Reddy twice last month unexpectedly ordered lenders to set aside more funds amid concern surging global oil and commodity prices may further stoke inflation. Finance Minister Palaniappan Chidambaram says India can afford a moderation in growth and that fighting inflation is now his top priority.

``The government and the central bank will use all possible tools to keep inflation in check,’’ said D. H. Pai Panandiker, president at RPG Foundation, an economic policy group in New Delhi. ``They won’t take a chance with inflation now.’’

Reddy has raised the central bank’s cash reserve ratio seven times since December 2006 and increased its key overnight lending rate seven times in the past 2 1/2 years. That’s yet to put a dent in India’s inflation rate, which climbed to more than 8 percent in March, the highest in almost four years.

Higher borrowing costs are discouraging consumers in the South Asian nation from taking out loans to purchase motor vehicles produced by Maruti Suzuki India Ltd., the maker of half the cars in India, and refrigerators made by Samsung India Electronics Ltd. and other companies.

Rice, Lentils

The 52 percent of the Indian population of 1.1 billion people that survive on less than $2 a day also have less to spend on consumer goods because of the higher prices they are paying for food staples such as rice and lentils.

India’s consumer-goods production fell 0.1 percent in March from a year earlier, after increasing an average 7.2 percent in the previous 12 months. Industrial output gained 3 percent in March, the slowest pace since 2002.

``The biggest drag on growth is industry,’’ said Sujan Hajra, chief economist at Anand Rathi Securities Ltd. in Mumbai.

Still, the slowest economic growth since 2005 may not be enough to prompt the central bank from reducing borrowing costs. India is unwilling to risk an inflation flare-up from lower interest rates at a time when the government is bracing to face elections due by May 2009, analysts said.

Rising prices have already hurt the government’s popularity. Prime Minister Manmohan Singh’s Indian National Congress party this week lost elections in the southern state of Karnataka to rival Bharatiya Janata Party, its ninth setback in the 11 provincial polls held since January 2007.

India’s GDP Forecasts

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GDP YoY%
Company Jan-March
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Median 8.1%
Average 8.1%
High 8.6%
Low 7.4%
Number of Estimates 20
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Anand Rathi Securities 7.8%
Citi 8.3%
DBS Group 8.1%
Dun & Bradstreet Info. 8.1%
Edelweiss Securities 8.1%
Forecast Singapore 8.1%
Goldman Sachs 8.6%
HSBC Singapore 7.5%
ICICI Bank 8.2%
ICICI Securities 8.3%
IDBI Gilts Ltd. 8.2%
JPMorgan Chase Bank 8.2%
Kotak Mahindra Bank 7.9%
Kotak Securities Ltd. 7.4%
Lehman Brothers 8.2%
Securities Trading Corp. Of India 8.0%
Standard Chartered Bank 8.1%
Thomson IFR 8.1%
UBS 7.9%
Yes Bank 8.5%
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