India economy surges, inflation not a major concern

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Inflation, farming in focus
The annual wholesale price inflation was a benign 1.34 percent in October, but economists have said it could rise to as much as 8 percent by the end of the fiscal year -- above the central bank's perceived comfort zone around 5 percent.

Food prices jumped 15.6 percent in the year to mid-November, although supply-side inflation is largely beyond the purview of monetary policy.

High food prices are sensitive in a country that remains mostly rural and poor, complicating government efforts to implement pro-market financial sector reforms.

On Monday, opposition party workers burned buses and shut down businesses in the eastern city of Kolkata to enforce a 12-hour strike to protest rising food prices.

Agriculture, which accounts for roughly 17 percent of the economy, remains a wild card after farm output grew 0.9 percent during the quarter, beating expectations for a decline.

Central bank Deputy Governor Subir Gokarn said he would not be surprised if growth slowed in the December quarter.

"While it is a recovery and it seems to be gaining strength, we should not ignore the fact that it is still being driven substantially by public spending," he told reporters.

Rajeev Malik, economist at Macquarie in Singapore, stuck with his view that the central bank would use liquidity management rather than rate rises in December and January as farming output was likely to fall.

"I don't think they are going to be swung by what agriculture has done," he said.

On the plus side, long-running declines in exports and credit growth are poised to reverse in coming months as the global economy shows signs of recovery.

Nomura lifted its growth forecast for the Indian economy in 2009/10 to 7 percent from 6 percent following Monday's data.

A top government official played down inflation concerns.

"I don't believe there are serious worries on inflation except food prices. Food prices are a matter of concern, but I don't think conventional monetary policy will take care of that problem," said Montek Singh Ahluwalia, deputy chairman of India's Planning Commission.

He also reiterated the government stance that stimulus would remain in place.

"Personally, I don't think the second quarter numbers suggest any change in the (fiscal) policy in the current year," he said.

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.

The central bank cut its key lending rate by 425 basis points between October 2008 and April. Late last month it began scaling back its monetary stimulus by removing some of the liquidity support measures implemented to help weather the global downturn.

Economists polled by Reuters poll at the time were divided over when the central bank would begin to raise interest rates, but all saw rates rising by the end of April. The central bank will hold monetary policy review meetings in January and April, but can adjust rates at any time.

Consumers' share of spending in the economy totalled 53.5 percent in July-September, little changed from a year earlier, while the government's share rose to 10.6 percent from 8.7 percent on the back of stimulus spending, Monday's data showed.