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India's woes deepen as GDP misses expectations

Friday, 30 Aug 2013 | 7:41 AM ET
A man counts Indian rupee notes near the Bombay Stock Exchange building.
Dhiraj Singh | Bloomberg | Getty Images
A man counts Indian rupee notes near the Bombay Stock Exchange building.

India's gross domestic product (GDP) growth missed expectations in the quarter to June slowing to a four-year low, adding to the country's economic problems amid an unprecedented free-fall in the rupee.

Official figures released on Friday revealed that India's GDP expanded by 4.4 percent year-on-year between April and June, falling short of analyst forecasts of 4.7 percent growth.

It marked the slowest growth since the January-March quarter of 2009, and was driven by a contraction in the country's mining and manufacturing sectors.

(Read more:Rupee slump buzz kill for Indian tourists)

Growth also slowed on the previous quarter – when GDP came in at 4.8 percent - and was less than last year's expansion rate of 5 percent, which was the slowest pace in a decade.

Manufacturing fell by 1.2 percent year-on-year in the June quarter, while mining slipped by 2.8 percent. Farming and construction output, however, both expanded, by 2.7 percent and 2. 8 percent respectively.

Earlier this week, BNP Paribas slashed its India growth forecast for fiscal 2014 to just 3.7 percent, from 5.2 percent previously. The bank cited fears that the economy was "entering a tail spin" as business confidence collapses under the weight of rapid rupee depreciation, rising energy costs, sharply tightening financial conditions and policy confusion.

The Indian rupee posted its biggest monthly fall in at least 18 years in August, but gained for a second straight session on Friday, eased by aggressive central bank intervention.

Fears 'unfounded'

Friday's data will add to the political and economic challenges faced by Indian Prime Minister Manmohan Singh's government, with elections just a few months away.

Singh told parliament on Friday that there was no reason to believe the Indian economy was in a similar situation to 1991, adding that fears of Indian growth falling to 3 percent were completely "unfounded".

(Read more: Why the rupee may not be headed to 70)

He did say, however, that the falling value of the Indian rupee was "a matter of concern" that could be blamed in part on "external" factors.

Taimur Baig, chief economist for global market research at Deutsche Bank, told CNBC that India faced significant challenges.

(Read more: For many Indians, overseas collegedegrees now unaffordable)

"The risk is that markets are going to be disorderly - exchange rates overshoot, creating huge amounts of real economic pain. Whether that is repayment of debt difficulties for those who have borrowed in dollars, or inflation problems because of the pass through from the exchange rate, it is non-trivial," Baig said.

"India is also hostage to external market sentiment, so if we see continued volatility around taper, I think the exchange rate volatility will remain, not just in India but in large EM [emerging market] economies that are characterized by large current account deficit," he added.

By CNBC's Jenny Cosgrave: Follow her on Twitter @jenny_cosgrave

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