India's economic growth skidded to 6.9 percent in the July-September quarter, its lowest in over two years, and is forecast to slow further amid delayed economic reforms and a worsening global outlook.
High inflation has weakened demand and prompted the central bank to hike interest rates 13 times, crimping growth as a dour global economy squeezes credit and exports. Policy inertia and corruption scandals have also slowed the flow of crucial investment and helped push the rupee to record lows.
The growth figure released Wednesday was in line with expectations and put pressure on the central bank to arrest _ and perhaps reverse _ its streak of rate hikes.
"There is clearly a momentum to deceleration setting in, largely driven by a declining investment cycle," said HDFC Bank chief economist Abheek Barua. "The manifestations of that will be far more acute next year."
Fixed capital formation _ a measure of investment in big ticket items such as machinery _ posted a contraction for the first time since fiscal year 2009, according to Citigroup.
Barua predicts growth will be about 7.3 percent for the year, down from 8.5 percent last fiscal year ended March. Next fiscal year, he anticipates growth will slow even further, to 7.0 percent _ a real worry in a country where policy makers have said that growth near 10 percent is required to absorb millions of young job seekers and lift tens of millions out of poverty.
With monetary policy largely tapped out and a deficit that gives the government little room for fiscal stimulus, economists and business leaders say broad reform is required to rekindle investment and growth _ no easy task in India's cacophonous coalition democracy. The furor over the government's long-delayed decision to give foreign retailers greater access underlines the difficulty of implementing meaningful policy changes.
"If the government makes some progress toward fiscal consolidation and gets some infrastructure projects _ particularly power and roads _ off the ground, we could avoid a sharp slowdown next year," Barua said.
Fights over land acquisition and flip-flopping environmental approvals have stalled some big-ticket projects and dampened investor sentiment. Such bottlenecks contributed to the 2.9 percent contraction in mining during the quarter, down from an 8.0 percent expansion a year earlier.
Europe's sovereign debt crisis has also prompted European banks _ which provide some $150 billion, or over 50 percent, of foreign currency loans to Indian companies, according to Barua _ to pull back, making it harder to fund expansion.
Meanwhile, bruising inflation has hurt domestic spending, helping drive manufacturing growth for the quarter to 2.7 percent, down from 7.8 percent a year earlier.
Agricultural output expanded 3.2 percent for the quarter, down from 5.4 percent a year earlier.
"The cost of capital in India is one of the highest in the world and only some strong positive developments would induce industry to invest," said Chandrajit Banerjee, the director general of the Confederation of Indian Industry, a business lobby. "The corrective actions are very much in the hands of domestic policy makers."
Markets took the news in stride, with the benchmark Sensex index closing up 0.7 percent at 16,123.46.