NEW DELHI (AFP) — India's first-quarter economic growth slowed to 7.9 percent, the weakest in three-and-a-half years as interest rate hikes hit demand, but analysts said long-term prospects still looked solid.
The figure for the three months to June was far below the previous quarter's growth of 8.8 percent and the 9.2 percent expansion logged by Asia's third-largest economy in the first quarter a year earlier.
"Growth has further to fall from here," said HSBC economist Robert Prior-Wandesforde, at the same adding the downturn was "cyclical not structural in nature," and there was "no need to panic about the country's long-term growth prospects."
India's economy, which has drawn billions of dollars in foreign investment, has been steadily losing steam as the central bank has aggressively raised interest rates to curb inflation now at 13-year highs.
It was the weakest quarterly expansion since the last quarter of calendar 2004 and below market expectations that the economy would grow by 8.1 percent.
However, Indian Finance Minister Palaniappan Chidambaram noted there were still "very few countries which are growing at near eight percent" and projected growth for the full year to March 2009 of "close to eight percent."
However, some analysts have forecast growth this year as low as seven percent, dragged down by aggressive monetary tightening, a drop in farm output and global financial turmoil and say the economy will not start picking up until the second half of the next financial year.
The economy is "unlikely to recover particularly quickly," said Prior-Wandesforde.
India's economy grew by nine percent last year and 9.6 percent the previous year.
Inflation which has nearly tripled in the past year has been stoked by a surge in global oil and other commodity prices.
The Congress-led government is anxious to tame prices to avert a voter backlash in general elections due by May 2009 but has said it also does not want to sacrifice growth needed to battle poverty.
Annual inflation slowed for the first time in a month, falling to 12.40 percent, figures late Thursday showed. But economists said they expected another round of monetary tightening to curb inflation which they forecast would remain in double-digits for at least the rest of 2008.
The Reserve Bank of India has raised rates three times since June, continuing a tightening cycle that began in 2004, and the bank's key short-term lending is now at nine percent -- a seven-year high.
"My sense is there is still one more round of tightening in store and the central bank wants to be on top of things," said Dharma Kriti Joshi, principal economist at Crisil credit rating agency.
Shares ignored the weak growth data, closing up 3.67 percent or 516.19 points at 14,564.53, helped by stronger-than-expected US expansion figures.
In the first quarter, manufacturing growth almost halved to 5.6 percent from 10.9 percent a year earlier, pulled down by the rise in interest rates. Utilities grew by just 2.6 percent, down from 7.9 percent a year earlier.
Services which contributes over 50 percent to GDP slowed to 10 percent -- the weakest rate of growth in three years.
"The prolonged slowdown in manufacturing does now finally look to be spreading to services," said Prior-Wandesforde.
Agriculture grew by three percent, down from 4.4 percent a year earlier.
While agriculture represents just under 20 percent of GDP, the sector's health is vital to the economy as some 60 percent of India's 1.1 billion people rely on it for a living.
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