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Why Market Watchers Aren't Giving Up on India

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Asia's third largest economy, India, has repeatedly underwhelmed markets over the past year, with sluggish economic growth in the January to March period being no exception. But economists remain upbeat saying the worst days may be behind this South Asian nation.

Gross domestic product (GDP) growth in India ticked a notch higher to 4.8 percent in the first quarter of 2013, from 4.7 percent in the previous three months. Overall, for the full fiscal year that ended in March, growth came to 5 percent - its slowest pace in a decade.

"I'm inclined to take a glass half full approach to this. The numbers do provide a glimmer of hope - the fact that it didn't surprise to the downside brings an end to disappointing GDP releases. Also, it represents a fractional improvement from previous quarter," Robert Prior-Wandesforde, director of Asian economics research at Credit Suisse told CNBC.

The bank estimates growth in the current fiscal year ending March 2014 will accelerate to 6.5 percent.

(Read More: India's Chidambaram Sees 8% Growth by 2015)

"I would be looking for a pickup in investment growth. I'm also looking for reasonable pick up in export growth because the lagged effects of rupee weakness still have to be felt," headded.

A key factor expected to support investment is continued easing by the country's central bank - which has already cut interest rates three times this year by a cumulative 75 basispoints to 7.25 percent.

"The RBI [Reserve Bank of India]monetary policy stance will be a lot easier. While the transmission of interest rate cuts has been an issue, it looks like it will be resolved as the RBI will try to manage liquidity," Rahul Bajoria, economist at Barclays said adding that an encouraging sign is that wholesale funding rates have been coming down recently.

"That should help ensure that there is a modest recovery in economic activity in the next 12 months," he said. Barclays expects growth to speedup to 6 percent this fiscal year.

In its latest economic outlook published on Wednesday, the Organization for Economic Co-operation and Development (OECD) forecast a "hesitant" pickup in growth in the coming quarters helped by efforts to speed up the approval of large investment projects and relaxation of restrictions on foreign direct investment in a number of sectors.

(Read More: Fitch: We're 'More Than Likely' to Downgrade India)

The OECD added that a return to normal weather conditions will help to raise rural incomes, contribute to a decline in inflation and boost private consumption.

Private consumption, a key pillar of India's economy that makes up around 60 percent of GDP, has taken a hit in recent months driven by the slowdown in growth and sticky inflation.

Growth in private consumption slipped to 3.8 percent in the first three months of the year - a far cry from the 7-8 percent levels seen before the global financial crisis.

Some economists, however, argue that in the lead up to general elections in May 2014, private consumption could pickup.

"As long as there is some growth in disposable income - then consumption should improve over time - I'm not too concerned about medium term outlook," Bajoria added.

(Read More: Is a KeyPillar of India's Economy in Jeopardy?)

Haseeb Drabu, former chief executive of the Jammu & Kashmir Bank, however, believes the slowdown in consumption should not be taken lightly.

"India is moving from an investment-led downturn to a consumption-led downturn. Services are not picking up and services are what drove growth in the period of 9 percent[growth]," Drabu told CNBC-TV 18. "You will still have large structural constraints to growth."

- By CNBC's Ansuya Harjani

Contact World Economy

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