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(Reuters) – India’s economic growth slumped to its lowest level in nine years in the first three months of 2012, marking a dramatic slide in the fortunes of a country whose economy was boasting nearly double-digit growth before the global recession.

“Urgent and bold steps are immediately needed to prevent the economy from descending into a full blown crisis. This must be averted at all costs,” said Rajiv Kumar, secretary-general of the Federation of Indian Chambers of Commerce and Industry.

The economy grew 5.3 percent in the last quarter from a year earlier, a sharp slowdown from 9.2 percent growth in the last quarter of the previous year, government data showed. Finance Minister Pranab Mukherjee blamed the poor performance of the manufacturing sector, which shrank 0.3 percent from a year earlier, for the slowdown.

The data was released as the rupee plunged to yet another record low and protesters took to the streets across India to demand the scrapping of a steep petrol price hike announced last week.

The figures were the latest confirmation that the slowdown of Asia’s third-biggest economy is deepening.

“This is definitely a very important signal for the government – this is a make or break situation for India and the government has to step on the panic button,” said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.

“If the government doesn’t step in now, India’s sovereign ratings may be jeopardized.”

Prime Minister Manmohan Singh’s government largely blames factors beyond its control, such as the euro zone debt crisis, for its economic woes.

But many economists and investors say weak leadership and muddled policies have failed to curb government spending and alienated many foreign investors.

Slowing corporate investment, stubbornly high inflation and ballooning fiscal and trade deficits have led to comparisons with India’s 1991 balance of payments crisis, a watershed moment in the country’s history that led Singh, then finance minister, to drive through transformational economic reforms.

Critics of Singh’s fractious Congress party-led coalition government say it needs a crisis to break the policy paralysis that has stalled major reforms, such as allowing foreign supermarkets into the retail sector and reducing costly fuel, food and fertilizer subsidies.

But Thursday’s nationwide strike called by opposition parties to protest the petrol price hike underscored the difficulty the government faces in pushing through unpopular economic reforms. The petrol price was increased last week after a six-month freeze.

The strike forced businesses, public transport, government offices and colleges to shut down in most of India’s 28 states.

A usually bustling Mumbai, India’s financial capital, looked deserted as people stayed at home and many shops remained closed. Protesters pelted buses with stones and lay down on train tracks to disrupt rail travel into the city.

TV footage showed protesters in the states of Madhya Pradesh, Odisha and Bihar burning tires and photos of Singh and Congress party leader Sonia Gandhi.

The 5.3 percent growth rate was much weaker than expected and was even below the lowest forecast in a Reuters poll that had produced a median of 6.1 percent from predictions ranging between 5.5 percent and 7.3 percent.

Quarterly expansion was last lower in the January-March quarter of 2003 at 3.6 percent, Thomson Reuters data showed.

SLOWDOWN BOTTOMED OUT?

The GDP data showed that the manufacturing sector shrank 0.3 percent compared with a year earlier. The farm sector grew just 1.7 percent.

Gross domestic product rose 6.5 percent in the fiscal year to the end of March 2012, the lowest growth rate since 4.0 percent in 2002/03 and a sharp slowdown from the previous year’s 8.4 percent.

In the three years before the global financial crisis, India’s economy was roaring with growth of well above 9 percent and ambitions to challenge China as the world’s top emerging economy.

Indian benchmark 10-year government bond yields dropped 16 basis points as investors started to price in an interest rate cut to help the economy. India’s main stock index .BSESN was down about 0.6 percent.

Standard & Poor’s cut India’s credit rating outlook in April to negative from stable, worried by India’s fiscal and current account deficits. The decision jeopardizes India’s long-term rating of BBB minus, the lowest investment grade rating.

Mukherjee said on Thursday most of the factors that had led to India’s growth slowdown had “bottomed out”.

Private economists have cut growth forecasts to between 6 percent and 6.5 percent for the current fiscal year to March 2013. The government forecasts close to 7.5 percent.

The rupee fell on Thursday to a record low beyond 56.50 per dollar. Its slide of 14 percent from its 2012 high adds to inflation concerns in the country and raises the cost of imports.

That leaves policymakers in a bind. The government ran a fiscal deficit in the year to March 2012 of more than 5.7 percent of GDP, new figures on Thursday showed, suggesting it has little financial room to stimulate the economy.

The central bank will be wary that reducing interest rates could fuel inflation, which is already above 7 percent. A rate cut could also undermine the rupee further.

“The RBI is fighting a multi-faceted battle – managing currency, supporting growth, fighting inflation. I think they will wait for fiscal consolidation before cutting rates further,” Rahul Bajoria, an economist at Barclays in Singapore, said.

(Additional reporting by Annie Banerji, Satarupa Bhattacharjya and Arup Roy Choudhury: Writing by Ross Colvin; Editing by John Chalmers and Neil Fullick)