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The performance and efficiency of an induction motor drive system can be enhanced by online estimation of the critical parameters, such as the rotor time constant and stator resistance. A novel Luenberger-sliding mode observer with parameter adaptation algorithm is proposed in this paper to compensate for the parameter variation effects. The observer is simple and robust when compared with the previously developed observers, and suitable for online implementation. A field-programmable-gate-array-based controller has been implemented, and demonstrated using hardware-in-the-loop simulation setup. An experiment has been carried out with an induction motor using the controller to verify the algorithm.