India's economic growth slows as rising prices hurt

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India has reported weaker-than-expected growth numbers for the first three months of the year.

The country's economy grew by 7.8% in the first quarter compared with the same period last year, the latest government figures showed.

For the financial year to March, the economy grew by 8.5%, lower than the government's forecast of 8.6%.

India is one of the fastest-growing economies in the world, but has been hit hard by rising consumer prices.

Analysts say a surge in prices of essential commodities, coupled with measures to cool the economy, has started to take a toll on growth.

"Raging inflation and a gradual increase in borrowing costs has dampened domestic demand, alongside lacklustre investment sentiment," said Radhika Rao of Forecast Pte.

The central bank has increased interest rates nine times in 15 months.

The last rise on 3 May boosted the benchmark interest rate by 50 basis points to 7.25%.

"We have a situation where inflation is uncomfortably high, so the authorities are tackling it by raising interest rates," said Justin Wood of the Economist Corporate Network.

"Obviously this tightening environment has been slowing things down." he added.

Losing momentum

India's economy has posted robust growth since the global financial crisis.

However, the Reserve Bank of India's monetary tightening policies have seen a loss of momentum.

Analysts say that as the central bank continues its fight against rising prices, the pace of growth is likely to be slow for some time.

"I think this loss of growth momentum will continue for industry for a quarter or two because we are not yet done with interest rate hikes," said Shubhada Rao of YES Bank.

However, analysts warned that though a slowdown in growth had been broadly expected, continued loss of momentum would have an adverse effect on the economy.

"It is significant because it is the first quarter of sub-8% growth since the crisis," said Sonal Verma of Nomura.

"The last four quarters we have been growing above 8%, so this is really a slow starting point for the next financial year," she added.

'Soft patch'

Image caption,
Rising food cost is of worry in a country where food makes up a huge chunk of the consumption basket

The Indian government had set an economic growth target of 9% for this fiscal year.

However, in May Finance Minister Pranab Mukherjee admitted that India could miss that goal because of high inflation and rising commodity prices.

"When you look at India, it is perhaps going through a slight soft patch," said Mr Wood.

"Most countries would be delighted with the growth numbers India is recording, but it's lower than government growth targets."

Mr Wood added that while India's had grown robustly compared to developed economies, compared with China, it was lagging behind.

China's economy expanded 9.7% in the first three months of this year compared with the same period the year before.

"They would love to emulate China's growth, but we don't think they are there yet," said Mr Wood.