India's GDP Growth Holds at Slowest Pace Since 2005

India’s economic growth held at the weakest pace since 2005 as the highest interest rates in six years discouraged consumer spending and investment.

Asia’s third-largest economy expanded 8.8 percent in the three months to March 31 from a year earlier, matching the revised gain of the previous quarter, the statistics office said today in New Delhi. Analysts forecast an 8.1 percent increase.

Reserve Bank of India Governor Yaga Venugopal Reddy has kept borrowing costs high to slow inflation, which has doubled in the past four months. That’s hurt the nation’s economic expansion, prompting the finance ministry yesterday to ease companies’ overseas borrowing rules to spur investments.

``Both growth and inflation are causes of concern,’’ said Sanjay Peters, an economics professor at ESADE Business School in Barcelona. ``Reining in inflation at the cost of growth is an unviable justification -- growth is key to cutting poverty.’’

India’s benchmark Sensitive index was almost unchanged after the data was released, rising 0.5 percent to 16,404.75 at 11:10 a.m. in Mumbai. The key 10-year bond yield rose to 8.08 percent from 8.05 percent before the report.

India’s economy expanded 9 percent in the year ended March 31, the least in three years, today’s report said. Prime Minister Manmohan Singh wants to accelerate growth to 10 percent by 2012 and sustain that pace to reduce poverty in the world’s second most populous country. The World Bank estimates about half the nation’s 1.1 billion people live on less than $2 a day.

Electoral Losses

Still, India is unwilling to risk an inflation flare-up from lower interest rates at a time when the government is bracing for national elections due by May 2009, analysts said. Singh’s Congress party has already lost ground in nine of 11 provincial polls held since January 2007 amid rising prices.

Higher fuel prices may also stoke inflation. India’s Cabinet is due to meet in coming days to seek ways to cut losses at state-run refiners that have risen to more than $1 billion a week as crude oil costs soar. The meeting will consider ``all options,’’ including an increase in fuel prices, Oil Minister Murli Deora said yesterday.

To boost growth, the finance ministry yesterday raised the limit on overseas borrowing by companies for domestic spending. Infrastructure companies can borrow as much as $100 million overseas, up from a previous limit of $20 million, while other companies can borrow as much as $50 million, compared with an earlier cap of $20 million.

Rising Incomes

India’s expansion, to be sure, is still the second-fastest after China among the world’s major economies, spurred by rising incomes. The South Asian country is growing at more than three times the pace of the U.S. and the nations sharing the euro.

The Reserve Bank of India, whose priority is to keep prices in check, has raised its key overnight lending rate seven times in the past 2 1/2 years and increased the cash reserve ratio, or the proportion of deposits lenders must set aside, seven times since December 2006 to slow money supply and cool inflation.

That’s yet to put a dent in India’s inflation rate, which stood at 7.82 percent in the week to May 10. The Federation of Indian Chambers of Commerce and Industry say relying on monetary tools isn’t the correct way to tackle inflation, which is ``largely driven by supply-side factors.’’

``It is supply shortage that is aggravating inflation in the case of food products, and the inflationary pressure in the case of manufactured products is the result of continuous cost buildups of raw materials and oil products,’’ the trade body said in a report on May 24. ``Rising interest rates, besides curtailing demand, are also adding to the cost of companies.’’

Cars, Motorcycles

Tata Motors Ltd.’s profit in the year ended March 31 gained at the slowest pace in at least five years as steel and other input costs increased and consumer demand diminished. Bajaj Auto Ltd., India’s second-biggest motorcycle maker, expects sales to remain sluggish this year. Industry accounts for a quarter of India’s $912 billion economy.

``The year ahead is a challenging year,’’ said C. Ramakrishnan, chief financial officer at Tata Motors, the Indian automaker that’s buying Ford Motor Co.’s Jaguar and Land Rover units. ``High interest rates, raw material costs and credit availability continue to be challenges.’’

As industry slows, demand for services such as travel and banking, which make up 55 percent of the economy, may also wane. Airbus SAS, the world’s largest planemaker, said this week that India is among the weakest airliner markets right now and the country’s carriers may cancel or delay plane orders in the next 12 months.

The Business Confidence Index, prepared by the New Delhi- based National Council of Applied Economic Research, fell 3.4 percent in the current quarter ending June 30, because of concerns over accelerating inflation hurting the investment climate and slowing the economy.