By Frank Jack Daniel
NEW DELHI (Reuters) - India's economy extended its long slump in the last quarter, with lower-than-expected growth keeping it on track for its worst year in a decade and underscoring the urgency of politically difficult reforms to spur a revival.
The economy grew 5.3 percent from a year earlier in the July-September period, provisional gross domestic product (GDP) data showed on Friday, below the 5.5 percent posted for the three months ending in June.
"It is essential that the reform agenda is carried forward with vigor and that the recently announced measures are implemented," leading business chamber FICCI said.
Prime Minister Manmohan Singh's chief economic advisor forecast full-year growth of between 5.5 and 6 percent, which would be the slowest since 2002/3.
"It will be between the two, because in order to get 6 percent we really need very strong growth in the second half," advisor C. Rangarajan told TV network CNBC.
A growth rate below 6 percent for the third quarter in a row is damaging for a country that aspires to at least 8.5 percent expansion to provide jobs for its burgeoning population, and makes it tougher for Singh to fund flagship welfare programs.
The quarterly number was lower than a Reuters poll had forecast and matched the January-March quarter, which was the weakest growth rate in three years. However, economists say inflation worries mean the Reserve Bank of India (RBI) is unlikely to cut interest rates when it meets on December 18.
Facing the prospect of the downturn stretching into a general election due in 2014, Singh launched some of the most daring initiatives of his eight-year tenure in September, including raising subsidized diesel prices and opening the airline and retail sectors to foreign players.
These moves are likely to encourage investment going forward, and Friday's figures showed capital formation at 33.8 percent of GDP, its highest for at least two years.
Singh, however, is fighting to defend his reforms in parliament, where a non-binding vote on the supermarket policy will be held on Wednesday. The outcome may test the minority government's appetite for further reforms ahead of a string of state elections starting in December.
RECOVERY SEEN NEXT YEAR
Despite the current gloom, most economists expect the business-friendly measures to help investment to gradually pick up and the economy to slowly recover next year.
"We are getting close to the bottom, although we are most likely talking about a `bathtub shaped` recovery with some bottom scraping in coming quarters," HSBC Global research said in a note.
The government and economists warn more needs to be done to attract capital and modernize India's decrepit infrastructure. Opposition parties say the reforms hurt the common man and weaken regional governments.
India is battling weak consumer demand in overseas and domestic markets. The rupee remains weak and the trade deficit the widest ever after merchandise exports, which make up about 10 percent of GDP, fell for six straight months. Industrial output has contracted in four out of last six months.
Reaction to the data was muted from financial markets, which were still cheering the end of a deadlock in parliament that had threatened to hold up debate on reforms to attract foreign investment in the insurance and pension industries.
Mumbai's main stock index <.BSESN> hit a 19-month high.
Markets were also buoyed by a mildly upbeat view from Goldman Sachs on Thursday, with a report forecasting India's economic growth was likely to accelerate to 6.5 percent in 2013.
CHIDAMBARAM PRESSES FOR RATE CUT
Growth was dragged down by subdued manufacturing output growth of 0.8 percent on the year and farming output of 1.2 pct.
Finance Minister P. Chidambaram on Friday again pressured RBI to cut interest rates, saying its tight monetary policy was a drag on the economy.
Low growth is making it harder for Chidambaram to rein in a wide fiscal deficit, which global ratings agencies say needs to be controlled if India is to avoid losing the investment grade designation on its sovereign debt.
In a major relief to the government on Tuesday, rating agency Moody's reaffirmed its stable outlook on India.
The deficit during the April-October period rose to 3.68 trillion rupees ($67.5 billion), or 71.6 percent of the budgeted full fiscal year 2012/13 target, data showed on Friday.
Chidambaram recently revised the target up to 5.3 percent form 5.1 percent, but most economists expect the government to overshoot this and hit around 5.5-5.6 percent.
The government says India needs to take more steps quickly, including speeding up approval for infrastructure projects, overhauling the tax system and reducing its swollen deficit to revive capital investment.
(Reporting by Rajesh Kumar Singh, Manoj Kumar and Arup Roychoudhury in NEW DELHI and Shamik Paul in MUMBAI; Writing by Frank Jack Daniel; Editing by Alex Richardson)