India grows 6.1 pct in June qtr; July CPI surges

An employee works inside a plant of General Motors India Ltd. at Halol, Ahmedabad August 28, 2009.

NEW DELHI (Reuters) - India's economy grew 6.1 percent in the June quarter from a year earlier, roughly in line with forecasts as government stimulus helped spur demand, but a poor monsoon threatens to erode growth later in the year even as it drives prices higher.

The difficult task facing India's central bank as it looks towards exiting its accommodative monetary policy was underscored by the 11.89 percent surge in India's consumer price index for July from a year earlier. That figure, released on Monday, compared with a 9.29 percent rise in June.

"The RBI's dilemma, between hiking policy rates and hurting growth or staying pat but risking higher inflation expectations, only gets worse," said Nomura economist Sonal Varma.

Consumers' share of spending in the Indian economy shrank to 55.6 percent in April-June from 58 percent a year earlier, while the government's share rose to 9.9 percent from 9.6 percent on the back of stimulus spending, Monday's data showed.

Other data, however, including a 31 percent surge in July car sales from a year earlier, have pointed to rebounding demand.

"Government spending has held up demand. This was a period when elections were held, and this also would have supported demand," said D.K. Joshi, principal economist at ratings agency Crisil, who expects the central bank to hold off on a rate hike until 2010.

Officials expressed optimism on Monday about the economic outlook, despite persistent worries about a monsoon on track to be the worst in four decades. Agriculture accounts for only about 17 percent of India's output, but rural consumption makes up more than half of domestic demand.

"The worst may be over," said Montek Singh Ahluwalia, the influential deputy chairman of the government's planning commission, which charts India's five-year growth plans.

Finance Secretary Ashok Chawla predicted growth of above 6.5 percent in the fiscal year ending March 2010, as strength in manufacturing and services offsets weakness in agriculture.

India's economy accelerated from its 5.8 percent rate in the previous quarter on pick-ups in the mining, manufacturing, and electricity and services sectors from the previous quarter.

MANUFACTURING, SERVICES

Growth was just above analysts' median forecast of 6 percent annual expansion, offering little fresh insight to the market on when the central bank was likely to start tightening policy.

"I think by January they would want to send some kind of monetary signal to thwart inflationary expectations," said Abheek Barua, chief economist at HDFC Bank in New Delhi.

"By the April policy meeting, we will see the first rate hike of 25 basis points preceded by a 50 basis point increase in CRR (cash reserve ratio)," he said.

The services sector, which accounts for more than 57 percent of the economy's output, grew an annual 7.8 percent in the June quarter, compared with 10.2 percent in the year-ago period. Manufacturing output expanded 3.4 percent in the June quarter while farm output was up 2.4 percent.

The stock market ended 1.6 percent lower, extending a drop of 1.1 percent before the GDP data was released.

The 10-year bond yield ended at 7.44 percent, just one basis point below a 2009 high hit during trade.

DEFICIT SPENDING

In the 2008/09 fiscal year, India's economy grew 6.7 percent, its weakest in six years and well below rates of 9 percent or more in the previous three years.

To offset the pain of the global downturn, India stepped up spending and took other measures to spur growth, and expects to run a fiscal deficit this year of 6.8 percent of GDP.

On Monday, the government said the deficit in April-July was at 1.59 trillion rupees ($32.5 billion), or 39.5 percent of the full-year target.

Just as early signs of recovery were visible with rising sales of cars and homes, the economy was jolted by the worst rainfall since 1972, with drought-like conditions engulfing 40 percent of the country's districts.

However, last week the Reserve Bank of India warned the poor monsoon was more likely to drive inflation than to curb growth.

The central bank cut its key lending rate by 425 basis points between October and April, and the government has slashed duty rates and stepped up spending to pump-prime the economy and prevent massive job losses.

Last month, the central bank estimated growth during 2009/10 at 6 percent with an upward bias. The finance minister said last week growth could rebound to 8 percent next fiscal year.

For a graphic on India's GDP trend, click: here

For a graphic on India's monsoon rains, click: here

(US$=48.85 rupees)