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Nov. 30 (Bloomberg) — India’s economic growth unexpectedly accelerated last quarter on consumer and government spending, adding pressure on the central bank to raise borrowing costs for the fourth time in a year.

Asia’s fourth-largest economy expanded 9.2 percent in the three months to Sept. 30 from a year earlier, the Central Statistical Organisation said in a statement today in New Delhi. Economists surveyed by Bloomberg News expected an 8.9 percent increase, matching the previous quarter’s gain.

Rising incomes and near-record bank loans are helping consumers buy more cars, mobile phones and homes in the world’s second-fastest growing major economy after China. That’s stretching the production capacity of companies and fanning inflation, and may prompt India’s central bank to increase interest rates in its next policy statement on Jan. 30.

“It’s definitely a strong number,” said Rajeev Malik, an economist at JPMorgan Chase & Co. in Singapore. “The biggest risk the economy faces is the pace of bank lending. There is demand pressure no doubt, and monetary policy will continue to be tightened.”

India’s benchmark wholesale price inflation rate held at 5.29 percent in the second week of November, above the government’s “tolerance” level of 4 percent. Manufacturing inflation rose to 4.59 percent, the highest in 1 1/2 years, as companies including Hindustan Lever Ltd., India’s biggest household products maker, raised prices of soap and toothpaste.

Chasing China

India’s $775 billion economy has grown more than 8 percent in six of the past seven quarters. China’s $2.2 trillion economy, Asia’s second largest, expanded 10.4 percent in the quarter ended Sept. 30, the quickest pace among the world’s 20 largest economies and almost four times the 2.6 percent gain in the 12 European nations sharing the euro.

Manufacturing increased 11.9 percent in the quarter ended Sept. 30 from a year earlier, according to today’s report, compared with an 11.3 percent expansion in the previous quarter.

Agriculture output gained 1.7 percent last quarter after a 3.4 percent expansion in the previous quarter.

The index of trade, hotels, transport and communication rose 13.9 percent in quarter ended Sept. 30 compared with 13.2 percent growth in the previous quarter. Construction grew 9.8 percent from a year ago.

“Cement prices are at a record and will gradually go up because of rising demand,” said Sanjay Ladiwala, president of the Cement Dealers’ Association in Mumbai. “Capacities are being added but not as fast as announcements are being made.”

Demand Pressures

Reserve Bank of India Governor Yaga Venugopal Reddy in his last monetary policy statement on Oct. 31 said demand pressures exist in the economy and that production capacity must match economic expansion to prevent inflation flaring up.

India’s trade deficit in the 10 months to Oct. 31 reached $41 billion, 20 percent more than in the same period last year, indicating “the strength of domestic demand, which is clearly outpacing the increase in supply, leading to soaring imports and other signs of overheating,” said Robert Prior-Wandesforde, an economist at HSBC Holdings Plc in Singapore.

Reddy is expected to raise interest rates again at the beginning of 2007 amid signs of “overheating” in the economy, the Paris-based Organization for Economic Co-operation and Development said in a report this week.

General Motors Corp., Royal Dutch Shell Plc. and other companies have invested in about 3,000 new factories and expansion projects worth about $21 billion in India since May 2004 to cater to growing demand, according to Finance Minister Palaniappan Chidambaram.

Growth Drivers

“One of the factors driving India’s growth is huge domestic consumption and the other is infrastructure spending,” said Rahul Bajaj, chairman of Bajaj Auto Ltd., India’s second- biggest automaker.

Per-capita income in India has doubled in the last nine years and the number of households earning an annual income of at least $10,000 is rising more than 20 percent a year, according to McKinsey & Co. Commercial banks’ outstanding loans have doubled in the past three years and has risen more than 30 percent since April 1.

The creation of new jobs in the software industry and at call centers is putting more money in the hands of some 350 million middle-class Indians. For example, Dell Inc., the world’s second-largest personal-computer maker, opened its fourth customer-service center in India this month as it seeks to reduce costs to shore up declining profit.

Call Centers

HSBC Holdings Plc, Europe’s biggest lender by market value, expects its workforce in India to increase by more than a third to 30,000 by March 2008, almost half of whom will be employed in its customer-contact center.

Agriculture production rose at the fastest pace in two years in the year ended March 31, increasing incomes of 650 million people who depend on farming for their livelihood.

That’s helped companies such as Maruti Udyog Ltd., which sells half the cars bought in India, post a 40 percent gain in fiscal second-quarter profit as it sold more of its new WagonR and Swift hatchback models.

Bharti Airtel Ltd., India’s largest mobile-phone service provider, said second-quarter profit soared 79 percent to a record because of a near-doubling of subscribers. India is the fastest-growing cellphone market in the world and companies added a record 6.71 million users last month compared with 6.07 million new users in September.

Infrastructure Spending

Growth in India’s economy is also benefiting from Prime Minister Manmohan Singh’s decision to increase spending on roads, ports and other infrastructure by a quarter to 992 billion rupees ($22 billion) in the year that started April 1 in a bid to attract overseas manufacturing companies and spur growth to 10 percent over a decade.

Infrastructure spending is spurring demand for steel, cement and electricity in India, which spends a seventh of China’s $150 billion investment in public works each year according to Morgan Stanley.

Governor Reddy last month left the central bank’s reverse repurchase rate, or the overnight borrowing rate, unchanged while increasing the repurchase rate, or the overnight lending rate, by a quarter point to 7.25 percent, to give itself room to take further action to prevent “overheating”.

The Reserve Bank of India, which for the first time said the economy is at risk of “overheating,” is reluctant to raise both the interest rates at its disposal at once to avoid slowing the economy too much. The government wants to accelerate growth to 10 percent pace over the next decade, from the average 8.2 percent in the past three years, to reduce poverty in the world’s second-most populous country.

“We have no other option but to grow at double-digit numbers,” said Mukesh Ambani, chairman, Reliance Industries Ltd., which owns the world’s third-largest refinery and is spending $5.4 billion to set up a retail chain of 1,500 stores across the country. “India has the potential to grow on internal consumption.”

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