New Delhi - India's economic growth slowed to 6.9% year-on-year (y/y) in the last quarter, its lowest in over two years, as the country is hit by a string of rate hikes and a weakening global economy, data showed on Wednesday.
The last time India's economy expanded at below 7% was in the financial quarter to June 2009 as Western economies were emerging from the global financial crisis.
"There's a clear slowdown of economic activity driven by the fall in manufacturing," Credit Agricole senior economist Dariusz Kowalczyk said.
He warned of a risk of a "quite significant" longer-term downturn due to India's aggressive monetary tightening and a weak international outlook.
India's central bank has raised rates 13 times since March 2010 in a struggle to curb inflation which has stubbornly held near 10%, while the latest global slowdown has hit demand for the nation's exports.
The figure for the July-to-September second quarter was in line with market forecasts. But it was sharply below 7.7% expansion in the April-to-June quarter, and 8.4% growth posted in the second quarter a year ago.
The slowdown was more bad news for the Congress-led government, which is facing strident opposition to its attempt to jumpstart its stalled reforms agenda by opening up India's vast retail market to global competition.
Prime Minister Manmohan Singh's popularity has already been sapped by high inflation which has hit India's poor masses hardest, and a streak of corruption scandals that sparked huge anti-graft protests.
India's manufacturing output grew by just 2.7% y/y, down from 7.2% expansion in the first quarter of the year, figures showed on Wednesday.
Mining production contracted by 2.9% after growing by 1.8% in the first quarter.
The government now says it expects economic growth of near 8% in the fiscal year to March 2012, a climbdown from its bullish projection in its February budget of 9% growth.
Many private economists predict growth of 7% or even lower, in contrast to the 8.5% in the year to March 2011.
On Monday, the Organisation of Economic Cooperation and Development warned that a slowdown in the global economy was set to hit emerging giants India and China, but could also bring a respite from inflation.
China's economic growth slowed to 9.1% in the last quarter from 9.5% in the previous quarter - its lowest rate in two years, hit by efforts to tame inflation and global economic turbulence.
The Indian government - hamstrung by debt - lacks the fiscal firepower to stimulate the economy, making it less able to weather another global downturn after the financial crisis of 2008-09.
Analysts said the slowing economy would pile more downward pressure on the Indian currency.
The rupee has tumbled by over 14% against the dollar in 2011 as international investors flee emerging markets for safer havens amid threats to global growth from the eurozone debt crisis.