(MENAFN - AFP) India's economic growth eased to 5.3 percent in the July-September quarter, extending a slowdown since the start of the year, according to the latest data, but analysts said a "modest recovery" could be looming.
The once-booming economy has been hit by high interest rates, Europe's debt crisis which has slowed exports and sluggish investment caused by domestic and overseas concerns about stagnant policy-making and corruption.
While the growth rate for the second quarter to September was in line with most market expectations, it was weaker than the 5.5 percent growth in the April-to-June quarter and well down from 6.7 percent expansion a year ago.
Manufacturing performed badly during the quarter, growing by a scant 0.8 percent from a year earlier. Services such as hotels and transport grew 5.5 percent while finance and property activities jumped by 9.4 percent.
But analysts saw a silver lining in falling global oil prices, growing domestic demand as incomes rise and the government's reforms to open up sectors such as retail and aviation to more foreign investment.
"The conditions for a modest economic recovery are now in place," said Credit Suisse Robert Prior-Wandesforde, citing expectations of easing interest rates and the government's recent reform blitz to liberalise the economy.
And C. Rangarajan, head of Congress Prime Minister Manmohan Singh's economic advisory council, expressed confidence that growth "in the second half (of the fiscal year) should be better".
"The overall growth rate for the economy could be between 5.5 and 6.0 percent for the full year," to March 2013, he told CNBC TV-18 news.
Goldman Sachs economist Tushar Poddar also saw "an improving outlook" and this week upgraded Indian shares in expectation of a pick-up in growth and easing inflation that would give the central bank more room to cut rates.
India's benchmark 30-share Sensex stock index has risen 11.15 percent from September to November, led by optimism over reforms and overseas fund inflows.
On Friday, it climbed almost 1.0 percent to 19,323.52 points -- its highest since April 2011.
India's growth numbers come as economists say the slowdown in neighbouring China may also be bottoming out.
China reported last month third-quarter growth of 7.4 percent, its weakest performance since the global financial crisis, but other data suggested recovery may around the corner.
However, despite the optimism about India's recovery prospects, some analysts sounded a note of caution.
Jyoti Narasimhan, economist at IHS Global Insight research group, said India's reform needs may be "greater than its political system's capacity to deliver at the moment", referring to political turmoil that has gripped parliament.
"Policy implementation uncertainty remains a key risk," she said.
The government is also unable to stimulate the economy with public spending and is under pressure to cut a widening budget deficit and avert a downgrade of its sovereign debt to "junk" status by global credit ratings agencies.
While 5.3 percent growth would be the envy of much of the world, it's not enough for India, which needs close to double-digit expansion as it seeks to reduce crushing poverty.
"For us, eight percent growth is not an aspiration but a necessity. India cannot afford to grow below eight percent," Finance Minister P. Chidambaram said last weekend.