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What’s really holding back growth in India

Raveendran | AFP | Getty Images

India's economic growth slowdown will not last long as the government moves to make foreign investment easier and push forward new infrastructure projects, the country's prime minister said on Thursday.

Economic growth in the world's largest democracy has slowed down dramatically, growing 5 percent last year after recording an average of nearly 8 percent over the last nine years.

"In the recent months, there has been much discussion on the fact that last year our growth rate came down to 5 percent. This is indeed true and we are trying our best to remedy the situation," prime minister Manmohan Singh said as he addressed crowds at New Delhi's famous Red Fort on Indian Independence day.

(Read more: Are onions the new headache for India's central bank?)

"I believe that this phase of slow growth in India will not last long," Singh said, adding, "The average rate of economic growth that we have attained in the last nine years shows what we are capable of."

But analysts believe Singh's claims of a short term growth slowdown are overstated and the political situation is holding back key reforms.

"Really what's going on in India, I think, is a combination of weak governance, bad politics, and bad macro imbalances. They are not going to turn around any time soon and what really needs to be done is a really serious burst of reform," Arnab Das, managing director of marketing research and strategy at Roubini Global Economics, told CNBC.

(Read more: Four reasons not to 'throw in the towel' for India)

He said the government has sent the "right signals" that it is serious about reform by appointing Raghuram Rajan as head of the Reserve Bank of India (RBI), but that the message has yet to be received by investors.

The Indian government has been hit with a string of corruption scandals over the last few years involving large companies like Vodafone, and has been accused of failing to implement reforms.

The rupee has weakened substantially despite India's finance minister Palaniappan Chidambaram pledging to cut the deficit to 3.8 percent of GDP this year and promising not to allow the currency to enter "free fall".

The RBI has looked to shore up the currency by introducing a raft of measures including increasing short term interest rates, draining market liquidity and reducing the amount local companies can invest overseas without seeking approval.

(Read more: Is India's rupee back in the danger zone?)

Singh's government has also raised the import tariff on gold and silver in an attempt to reduce pressure on the rupee and strengthen it.

India has also been affected by a global economic slowdown in the last year.

"The global economy is really turning down a gear at the moment when you look at the export environment for the Indian manufacturing sector, which is not only facing tough domestic conditions but a tough international environment too," said, Chris Williamson, chief economist at Markit.

Williamson expects more weakness in the Indian economy for the near future unless there is a dramatic push for reform.

"India's slowdown is a reflection of the global slowdown. Any reforms India make are not going to change the situation quickly. We are in for prolonged weakness for rest of year unless there are radical measures taken to boost the economy."

—By CNBC's Arjun Kharpal: Follow him on Twitter @ArjunKharpal and @CNBCWorld

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