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India's Economic Growth Slows To Decade Low

(c) Sky News 2013

India's economy has slowed to its lowest rate in a decade, expanding by 5% in 2012/13, with little sign of a quick recovery.

Low business confidence, slumping investment, high inflation and weak export demand from Western countries have been blamed for the bleak performance which comes ahead of national elections scheduled for next year.

Government statistics show Gross Domestic Product grew at 4.8% in the first quarter ending March 31.

The manufacturing sector grew an annual 2.6% during the quarter, while farm output rose just 1.4%, the data showed.

The services sector that makes up more than half of India's economy grew an annual 6.6% in the same period, and its mining sector contracted an annual 3.1%.

The figures will come as a blow to the emerging superpower which recorded an economy booming at an annual expansion of 9% until two years ago.

Led by Prime Minister Manmohan Singh and the Congress party, the government has been dogged by corruption scandals during its second term in office and has struggled to push through promised pro-business legislation.

"The government needs to go all-out to turn around investment sentiment," said Yes Bank (BSE: YESBANKSL.BO - news) chief economist Shubhada Rao.

Global ratings agency Standard and Poor's warned earlier this month that India faces at least "a one-in-three" chance of losing its prized sovereign grade rating amid new threats to economic growth and reforms.

India's BBB-minus investment rating is already the lowest among its BRICS peers Brazil, Russia, China and South Africa and cutting it would raise the country's hefty borrowing costs.

Government pressure has mounted on the central bank to ease borrowing costs after it raised interest rates aggressively in 2010 and 2011 to combat double-digit inflation last year.

It has obliged by cutting interest rates three times in 2013, but Reserve Bank of India governor Duvvuri Subbarao has said the bank has "limited space" to ease monetary policy further due to the risk of inflation flaring up again.

Speaking ahead of the release of the data, Jyotinder Kaur, an economist with HDFC Bank (BSE: HDFCBANK.BO - news) , who believes the Reserve Bank of India (RBI) should take action to get money flowing into the real economy said: "It is imperative that both the government and the RBI get their acts together.

"The room for policy response is limited but it is not completely absent," he added.

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