India forecast economic growth to slow to 5 percent for the fiscal year ending in March, the worst performance in a decade for Asia's third-largest economy.
The gloomy projection released Thursday is down from 6.2 percent growth in the previous year. Even that is below the rate of expansion that India needs to provide enough jobs for its exploding youth population.
After clocking impressive annual growth rates of up to 10 percent in the past decade, India's economy has slowed for several quarters amid high inflation, weak consumer spending and delays to economic reforms that chilled investment.
The central bank had held off cutting interest rates until recently because of the risk of fueling already elevated inflation.
But some analysts say the weak outlook for the economy and consumer demand could allow inflation to stabilize and give the Reserve Bank of India scope for further rate cuts. Its quarter percentage point rate cut last week was the first since April.
"Apart from stalled investment, the sharp slowdown clearly points towards continued slack in consumption demand, which is expected to keep the core inflation under check," said Upasana Bhardwaj, an economist with ING India.
Bhardwaj said he expects the central bank to cut interest rates by up to three quarters of a point this year to stimulate investment and spending.
Late monsoon rains partially contributed to agriculture's drop in growth to an estimated 1.8 percent from 3.6 percent the previous year, according to CRISIL Research analysis based on the government's numbers. It said weakness in domestic demand was behind the projection for services to expand 6.6 percent in the 2012-13 year, the slowest growth since 2001.
The International Monetary Fund on Wednesday forecast India's economy to grow 5.4 percent in the fiscal year ending March.
India is also wrestling with its expensive subsidies for commodities such as fuel that have swelled the government's budget deficit.
The Congress party-led government is promising financial reforms to reduce the fiscal deficit in the next budget due at the end of February, but the prospect of populist policies ahead of elections due next year has raised concerns about further increases in inflation.