Sunday, December 10, 2006

India's growth boosts short-term optimism

In the three months ended Sept. 30, gross domestic product rose 9.2% from a year earlier, the India's Central Statistical Organization said. The robust growth, powered by strong spending by Indian consumers and corporations, topped the 8.4% expansion in the same quarter of 2005 and was above analysts' expectations of GDP growth of 8.9%.

In the April-June period, India's GDP expanded 8.9% from a year earlier. The spurt in the two latest quarters means the country's economy grew at a rate close to China's in the first six months of the financial year that began April 1.

"The growth witnessed in the fiscal first half is the highest-ever growth since economic reforms started in 1991," Finance Minister P. Chidambaram said. "Just savor the moment."

India's surprisingly strong quarterly expansion has economists raising short-term growth forecasts but worrying that inflation and interest rates could rise and crimp growth in the longer term.

The unexpectedly strong performance gives some economists jitters. While few say India's economy is overheating, they caution that the faster expansion means politicians and financial regulators must keep a closer watch on the potentially negative side effects of increasing affluence.

Inflation, for example, is dangerously close to breaching the target rate set by India's central bank for the financial year of 5% to 5.5%. As measured by India's wholesale price index, inflation was running at 5.29% year-to-year in the week ended Nov. 11, and some analysts suggest it may have already risen above 5.5%.

Higher growth and inflation rates will likely persuade the Reserve Bank of India to raise its key rates at its next quarterly meeting in January, if not before.

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