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IMF Raises India's Economic Growth Forecast for 2006

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IMF Raises India's Economic Growth Forecast for 2006
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IMF Raises India's Economic Growth Forecast for 2006 - September 14th, 2006

IMF Raises India's Economic Growth Forecast for 2006

The International Monetary Fund raised its 2006 economic growth forecast for India, adding the central bank may have to raise interest rates further to curb inflation caused by higher demand for goods and services.

India's $775 billion economy, Asia's fourth-biggest, will expand 8.3 percent this year, 1 percentage point higher than April's estimate, the Washington-based lender said in its World Economic Outlook today. It increased India's 2007 growth projection by 0.3 percentage point to 7.3 percent.

India's economy is accelerating as hiring at computer companies such as Dell Inc. spurs consumer spending and boosts services such as banking and travel, which account for half of the nation's gross domestic product. Demand for houses and government spending on roads, ports and other infrastructure are also helping industrial production, which in July grew at the fastest pace in a decade.

``There is the possibility of even faster-than-projected growth,'' IMF said in its report. ``Inflation has picked up with rising oil prices and strong domestic demand. While the central bank has raised interest rates in recent months, further tightening may be needed to resist inflationary pressures.''

Reserve Bank of India Governor Yaga Venugopal Reddy and his fellow policy makers have increased the central bank's key overnight borrowing rate by 150 basis points since October 2004 to 6 percent, to keep record fuel costs and an expanding economy from stoking inflation.

`Upward Pressure'

The central bank said Aug. 30 that ``there are continuing signs of demand pressures that could exert upward pressure on prices when associated with supply shocks such as from oil''.

``There is a case for the central bank to raise interest rates again,'' said N. R. Bhanu Murthy, an economist at the Institute of Economic Growth, a policy research group in New Delhi. ``Demand-led inflationary pressures are strong.''

The Reserve Bank of India may increase its key rate by a quarter point at its next review on Oct. 31, six of 10 analysts surveyed by Bloomberg News said July 25, to contain inflation, currently at a two-month high of 5.01 percent.

India's economy expanded 9.3 percent from a year earlier in the quarter ended March 31, rounding off the financial year with growth of 8.4 percent, the fastest after China among the world's 20 biggest economies. The government will announce economic growth performance for the quarter ended June 30 on Sept. 29.

Cars, Textiles

India's government expects the economy to grow as much as 8 percent in the financial year ending March 31 after an average 8.1 percent expansion in the past three years.

Industrial production, almost a quarter of the economy, rose 12.4 percent in July from a year earlier, the largest increase since June 1996, as power companies almost doubled electricity output in July to keep up with demand from factories producing cars and textiles.

Industrial production is also expanding as Prime Minister Manmohan Singh's government boosts infrastructure spending by 24 percent to 992 billion rupees ($21 billion) in the year that started April 1 to accelerate growth, spurring demand for cement and steel. India spends a seventh of China's $150 billion investment in public works each year according to Morgan Stanley.

Consumer goods production almost tripled to 19.9 percent in July because of rising incomes.

Dell, Microsoft

Dell, the world's largest personal-computer maker, International Business Machines Corp., the world's biggest computer-services provider, and Microsoft Corp. are among overseas companies that are hiring workers in India where software programmers' wages are a sixth of those in the U.S.

Dell said in March it plans to double its workforce in India to 20,000 within three years. Microsoft said in December it plans to almost double its employees in the South Asian nation to 7,000 in the next two to three years. IBM added 15,000 workers in India last year.

Salaries in India may rise by 7.3 percentage points above inflation in 2006, the biggest increase forecast among 70 countries that includes U.S., U.K. and Japan, according to Mercer Investment Consulting Inc.

The Washington-based IMF called on India to take advantage of strong growth to get its finances in order to sustain the economic expansion.

Just four months into the financial year, India's deficit is already 58.1 percent of the total it planned for the year, the government's auditor said yesterday. The average gap during the same period in the past decade was 40.1 percent.

Budget Deficit

All eight analysts surveyed by Bloomberg News predict the deficit goal will be breached, forcing the government to borrow more money from a financial system that favors state funding over the more productive private sector, preventing interest rates from declining in the economy.

Prime Minister Singh's coalition is battling to cut expenditure while having to spend on programs such as one to provide jobs to rural youths that may cost as much of 10 percent of this year's revenue.

``Fiscal positions need to be put on a sustainable medium- term footing,'' the IMF said. ``With the general government deficit still high, further consolidation is clearly warranted.''

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Re: IMF Raises India's Economic Growth Forecast for 2006 - July 5th, 2007

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