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Analysts: Indian Economic Slowdown May Linger

Delegates attend closing session of WEF India Economic Summit, Mumbai, Nov. 14, 2011.

The slowdown in India’s economy is expected to continue into the next year, as growth in Asia's third largest economy plummets to its lowest level in two years.

India's July-to-September quarter registered only 6.9 percent growth, far lower than projected by the government at the start of the year. Economists blame the slowdown on both domestic and global factors. Investment has come down sharply following 13 interest rate hikes in the last 18 months.

Efforts to rein in inflation have failed so far. The global economic slowdown is also beginning to hurt India as exports and foreign investment decline.

Chief economist at HDFC Bank, Abheek Barua, says the economic slowdown could accelerate given that contributing factors are unlikely to go away quickly.

"There isn’t much of a silver lining," he said. "Things are just getting worse, and contrary to the government’s suggestion that this was a bad year and we will sort of bounce back, it is possible we will do worse next year if momentum in the adverse factors intensifies, and that seems to be the case.”

Economists say the government’s efforts to stimulate growth are not working. Many industrial and infrastructure projects are on hold due to what is being called a “policy inertia” -- the government’s failure to make decisions after an outcry over corruption scandals involving senior officials.

Hopes that this policy paralysis would be reversed after a recent decision to open the multi-brand retail sector to foreign investors have not come to pass. There are fears that a political outcry over the decision may prompt the government to delay its rollout.

Barua says optimism around the rapid growth India was experiencing is fading somewhat.

“There is some reassessment of the growth story," he says. "There is some serious rethink about sustainable levels of growth. Earlier, nine percent was taken for granted, [and] now we are struggling with seven.”

The government has cut its growth forecasts to around 7.5 percent. In a recent report, the United Nations also said that growth in developing countries like India and China, which have stoked the engine of world economy, will slow in 2012.