Chidambaram Says India May Sustain 9% Growth a Record 3rd Year

Dec. 3 -- India's 9 percent economic growth may be sustained for a record third year on prospects of bumper crops and a retreat in crude oil prices, Finance Minister Palaniappan Chidambaram said.

``If harvests are good, we are able to enjoy a bit of luck with crude oil, and we are able to moderate capital flows, which are putting pressure on inflation, we should have 9 percent,'' the Harvard-educated minister said in an interview in New Delhi.

Asia's third-largest economy grew last quarter at the slowest pace this year amid decade-high borrowing costs. JPMorgan Chase & Co. and HSBC Group Plc expect more than three years of interest-rate increases by the central bank to moderate India's expansion further.

``The combination of monetary tightening and a higher value of the rupee in the foreign-exchange market can put the brakes on the economy in the near term,'' said Stephen Roach, chairman of Morgan Stanley in Asia. ``I am very optimistic about India over the next three to five years.''

Roach says the economic slowdown will be temporary, and India's adoption of China-like policies on foreign investment and infrastructure development makes growth of as much as 9 percent ``eminently achievable.''

India's $906 billion economy grew 8.9 percent last quarter from a year ago. China's $2.6 trillion economy expanded 11.5 percent. That kind of pace is more than three times the rate of growth in the U.S. and countries sharing the euro.

Foreign Investment

Industry Minister Kamal Nath last month said almost all of India's economy is now open to overseas investment since Prime Minister Manmohan Singh, as the finance minister in 1991 started to dismantle India's Soviet-style controls on industry. Only some defense-related areas and retail remain closed, Nath said.

Since assuming office in May 2004, Singh's government has relaxed foreign investments in telecommunications and single- brand retail outlets. The government will this week consider easing foreign investment rules in aircraft maintenance companies, petroleum-marketing firms and commodity exchanges, the Economic Times reported.

To attract more funds from abroad, India last year enacted a law to enable construction of special economic zones, enclaves modeled on China's Shenzhen. The government also has a five-year plan to attract investments of $500 billion in roads, ports and other infrastructure.

Chidambaram said in yesterday's interview that while investment will continue to drive India's economic growth, ``there are some risks, such as crude oil prices, over which we have no control.''

Fuel Subsidies

India is Asia's third-biggest oil consumer and imports almost three-quarters of its needs. It hasn't raised fuel prices this year, when oil surged to a record, to protect consumers in a country where more than half the 1.1 billion population live on less than $2 a day. That's adding to an annual $25 billion subsidy bill which could have been spent instead on health, education and other infrastructure.

Crude oil for January delivery fell 9.7 percent to $88.71 a barrel last week on the New York Mercantile Exchange, the biggest weekly decline in two and a half years.

India's agriculture, which makes up a fifth of the economy, depends on the vagaries of the June-September monsoon rains to irrigate crops across the world's seventh-largest land mass.

There were more rains than forecast this season, according to the state-owned weather bureau, improving prospects for a record output of crops from rice to cotton and soybean.

``Ex-agricultural growth will continue to trend lower over the next 18 months because of the lagged effects of the tightening of policy conditions, both in the form of a stronger exchange rate and higher interest rates,'' said Robert Prior- Wandesforde, senior economist at HSBC in Singapore.

Interest Rates

India's central bank, which has raised its benchmark interest rate nine times since October 2004, on Oct. 30 ordered lenders to set aside more reserves for a fourth time this year to prevent inflows of foreign cash from reigniting inflation and pushing up the rupee, already at a nine-year high.

Global investors, encouraged by India's unprecedented economic growth, have bought $17.3 billion of stocks and bonds so far this year, higher than the previous record of $9.46 billion in 2005.

To check the flood of capital, the Securities and Exchange Board of India, the stock market regulator, on Oct. 25 barred issuance of offshore instruments tied to derivatives. The rupee has gained 11.7 percent against the dollar this year.

``The Indian rupee will retain a strengthening bias over the medium-term owing to robust capital inflows,'' said Siddharth Mathur, an analyst at JPMorgan Chase in Singapore. JP Morgan expects India's economy to grow 8.6 percent in the year to March 31, and 7.5 percent in the following 12-month period.

-- With reporting by Carol Massar in New Delhi. Editor: Michael Dwyer, David Tweed