India forecast on Tuesday economic growth would fall below seven percent for the first time in three years, hit by an aggressive string of interest rate hikes and economic reform paralysis.
Asia's third-largest economy will probably grow by 6.9 percent in the year to March -- far below a budget projection of nine percent -- and down from last year's 8.4 percent expansion, the governmentâs central statistics office said.
"The slowdown story is clearly evident," said Indranil Pan, chief economist at India's Kotak Mahindra Bank. "Mining and manufacturing growth has slipped sharply."
The 6.9 percent growth would be the slowest since 2008-2009 when India was reeling from the global financial crisis and the second weakest in nine years.
Economists expect growth to be even lower the following year at around 6.3 percent -- more than three percentage points below the peak of 9.6 percent hit in 2006-2007 during India's last economic boom.
India had hoped to attain double-digit growth within the next couple of years -- seen as key to easing crushing poverty -- but tight monetary policy, the fresh global downturn and reform gridlock have dashed those hopes, analysts say.
The central bank has raised interest rates 13 times since March 2010 to curb stubborn inflation, which at 7.47 percent is still the highest among the BRIC grouping of Brazil, Russia, India and China.
Manufacturing was expected to grow by just 3.9 percent in this fiscal year, slightly over half last year's level of 7.6 percent.
The weaker growth outlook may prompt the central bank to start reducing interest rates sooner and more aggressively than anticipated, Credit Suisse economist Robert Prior-Wandesforde.
On top of slower growth, analysts expect the government to overshoot its deficit target of 4.6 percent for the current year by at least a percentage point due to ballooning public subsidies to support India's poor.
Unlike during the last global financial crisis, "the fiscal space also does not afford a chance (for India) to pump-prime the economy," said Kotak Mahindra's Pan.
Global credit agency Standard & Poor's warned on Monday that India's prized investment-grade credit rating could be at risk due to slower growth, "weak" government policy-making and stubborn inflation.
India's economic reform process has been paralysed by a string of massive corruption scandals that has taken the sheen off Prime Minister Manmohan Singh's Congress party-led government.
S&P credit analyst Takahira Ogawa said he did not expect to change his "stable" outlook on India's "BBB-" sovereign credit rating in the near future but added that "negative factors... may lead us to a tipping point."
But even with the slowdown, India's share market has risen 15 percent this year and its currency has recovered from lifetime lows amid expectations of rate cuts that investors hope could spur an economic turnaround.
"India is cooling -- it is not collapsing," Standard Chartered chief economist Gerard Lyons told the Economic Times.
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