INDIA'S economy grew faster than expected in the three months to the end of June, easing some fears about a sharp slowdown in Asia's third-largest economy.
Growth was 5.5 per cent in the April to June period from a year earlier. Most analysts had forecast a rate of 5.2 per cent.
That compares with a 5.3 per cent annual growth rate in the previous quarter.
However, there are concerns that a lack of reforms, slowing factory output and investment may hurt long-term growth.
"Whilst an upside surprise at 5.5 per cent, the pace of growth is undeniably below potential and validates the need for the government to address sluggishness in investment and external sector activity," said Radhika Rao an economist at Forecast Pte.
India's economy has been hurt by a variety of factors in recent months.
Slowing global demand has affected the country's exports and dented industrial production. India's factory output fell 1.8 per cent in June from a year earlier, the third fall in four months.
At the same time, the government has been locked in a political battle with the opposition that has resulted in key reforms hitting a dead end.
To make matters worse, a number of corruption scandals has not only dented India's image but also hurt investor confidence.
Foreign direct investment in India fell by 78 per cent in June, from a year earlier.
Analysts said the government needed to take action to improve the investment climate in India if the country was to maintain a high rate of growth in the future.
"A sustainable growth in the coming quarters would largely depend up on well defined policy reforms," said Shakti Satapathy of AK Capital in Mumbai.
As India's economy has slowed in recent months, there have been calls for the central bank, the Reserve Bank of India (RBI), to cut interest rates in order to spur growth.
The central bank lowered its main interest rate in April this year to 8 per cent from 8.5 per cent, the first cut in three years.
However, despite calls for further cuts, it has kept the rates unchanged since then, in an attempt to keep consumer price growth in check.
The rate of inflation has come down gradually in the past few months. Consumer prices in India rose by 6.87 per cent in July from a year earlier.
That was down from a rate of 7.25 per cent in June and 7.55 per cent in May.
Howvere, analysts said that the better-than-expected growth data may see the central back keep its policy unchanged for the time being.
"I would think RBI would be reasonably happy with this number as it doesn't look as bad as they would have feared in July and most likely will keep rates unchanged next month," said A Prasanna, an economist with ICICI Securities Primary Dealership Limited.