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Warning: India's recovery may have hit a wall

Subhendu Sarkar | LightRocke| Getty Images

India's economic recovery hit a wall in third quarter as industrial activity lost momentum and patchy monsoon rains hurt farm output, gross domestic product (GDP) data due Friday is expected to show.

Growth in Asia's third largest economy decelerated to between 5-5.3 percent in the July-September quarter, down from 5.7 percent in the previous three months, according to analysts' forecasts.

"Signs are the economy hit a soft patch," Radhika Rao, economist at DBS wrote in a note.

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Industrial output growth is expected to have slowed sharply to 1.1 percent on year in the third quarter, from 4 percent in the previous three months, according to Goldman Sachs. Meanwhile, agricultural output growth is forecast to have weakened to 1 percent, from 3.8 percent in the previous quarter.

Service sector growth, however, is expected to have increased to 7.0 percent on year, from 6.6 percent in the previous quarter, according to the bank, helped by relatively strong growth in transport, communication and construction sectors.

High hopes

Nevertheless, economists expect the slowdown will be temporary.

"We expect that India's growth will ease in Q3But this does not distract from our call for growth to recover to above 6 percent in 2015 as the lift from reforms and investment revival percolate through the economy," said Vishnu Varathan an economist at Mizuho Bank.

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Hopes are running high for a revival of India's lacklustre economy since Prime Minister Narendra Modi came to power in May. This optimism is reflected in the performance of the benchmark Sensex, which has rallied over 30 percent so far this year, making India thebest performing equity market in Asia-Pacific.

Rao agrees that a growth upturn is around the corner.

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"While China has slowed down, India's high-frequency data and buoyant sentiments suggest that the economy is gradually on the mend albeit not off to the races as yet. We expect a cyclical recovery in FY15 to be followed by a structural upturn into FY16," she said.

Unlocking growth

While India's economic fundamentals are improving, helped by lower commodity prices, reforms remain key to putting the economy on a sustainable growth path, say economists.

The Indian parliament's month-long winter session that kicked off on Monday is crucial for Modi's Bharatiya Janata Party (BJP) government to prove they can deliver on reforms.

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The session – taking place between November 24 and December 23 – has 22 working days and a heavy legislative agenda.

Around 37 bills are up for discussion including raising the ceiling for foreign capital in the insurance sector, making changes to the land acquisition act and the Goods and Service Taxes (GST) bill.

"Concrete progress on the reform agenda will be important to sustain the financial markets' positivity and maintain the reform momentum," said Rao.