"The economy is nearing the bottom of the current cycle and there is recovery in sight as investment should improve from the fourth quarter, as the government has been actively trying to restart stalled investment projects, both from the public and private sectors," senior economist at Moody's Analytics Glenn Levine said in a note today.
"Yet the recovery will be modest, as weak business sentiment will take time to turn around. We expect fixed investment to grow 3.5 per cent in 2014 after being flat in 2013," he added.
The arm of the global credit ratings agency Moody's also said: "The days of 8 per cent GDP growth are gone. We expect the Indian economy to hit its potential growth rate of 6.5 per cent by the second half of 2015."
India's economy expanded by over 9 per cent in the three fiscal years before the global financial meltdown of 2008 and authorities have repeatedly maintained that the country has a potential to grow between 8-9 per cent.
Moody's said that a combination of good luck and modestly better policies will drive a steady acceleration in economic activity, although the upturn will be patchy and difficult to see for six months or so.
In 2008-09, the growth slipped to 6.7 per cent but picked up to 8.6 per cent in the following year and further rose to 9.3 per cent in 2010-11. Thereafter it started declining and slowed to a 10-year low of 5 per cent in the 2012-13 fiscal.
Weak investment and consumer demand have slowed growth over the past three years, Levine said, adding that the economy is nearing the bottom of the current cycle.
The financial markets have recovered modestly since September as new RBI Governor Raghuram Rajan has lifted sentiment, he said, but added that the fundamental problems remain unsolved.
The note is comforting as IMF last week had pegged GDP growth at 3.75 per cent citing weak demand from its earlier projection of 5.7 per cent. But the World Bank pegged it at 4.7 per cent yesterday. GDP growth slowed to a three-year low of 4.4 per cent in Q1.
Rebutting IMF projection, Finance Minister P Chidambaram had said: "We do not share this pessimistic outlook".
Moody's said, however, that the past three years have led investors and businesses to reassess the entire India story.
Expectations of 8 per cent or better GDP growth have been "supplanted by a more realistic assessment" of 6-7 per cent, it added.
"This shift in expectations and its self-fulfilling consequences suggest a structural component to the slowdown," Moody's Analytics said.
As per the government data released last week, IIP for the April-August period stood at a paltry 0.1 per cent, as against 0.2 per cent in the same period of last fiscal.
The Index of Industrial Production has a weight of 38 per cent in the overall Gross Domestic Product.
The report said GDP looks to be maintaining the slow pace of 4.4 per cent through the rest of 2013 and noted that high- frequency indicators confirm the parlous state of the economy which was visible from the 0.6 per cent growth in industrial production in the first five months of the fiscal.
On the demand side, the slowdown is largely an investment story, as confidence among corporates plunged amid rising inflation, ongoing external weakness, and the instability created by a weak central government, it said.
Fixed investment fell 1.2 per cent year-on-year in the second quarter, the report said, adding that capital goods production fell during the same period.
Moody's Analytics is a division of Moody's Corporation that also owns rating agency Moody's Investors Service.