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India's shock fall in industrial output

Aug 09 2012 12:18 Sapa-AFP

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New Delhi - India's industrial production contracted by a shock 1.8% from a year earlier in June, as manufacturing output shrank in Asia's third-largest economy, official figures showed on Thursday,

The data underscored the massive job ahead for India's new pro-market finance minister, P. Chidamabaram, who pledged this week to "restart the growth engine" of India's sharply slowing economy.

Manufacturing output, which accounts for three-quarters of the index of industrial production, fell 3.2% from a year earlier in June, according to the government data.

Manufacturing has been undermined by high interest rates to combat stubbornly high inflation, falling business confidence and Europe's debt crisis which has hit exports.

The 1.8% shrinkage in output by factories, mines and utilities in June was the third contraction in four months and followed a revised 2.5% production rise in May.

The industrial output reading was far below analysts' expectations, which were for an increase of 0.80%, according to a Dow Jones Newswires poll.

The weak performance is likely to pile pressure on the central bank to ease interest rates to spur growth.

The bank has said it wants inflation to come down before cutting borrowing costs, but Chidambaram has already indicated he wants lower rates, saying "sometimes it is necessary to take carefully calibrated risks".

The weak numbers come as the left-leaning Congress-led government is under pressure over a string of graft scandals and its attempts to liberalise the still inward-looking economy to spur growth have led to gridlock in parliament.

India's once-booming economy grew just 5.3% between January and March, its slowest annual quarterly expansion in nine years.

Capital goods output, an important investment indicator, slid 27.9% in June from a year earlier.

Goldman Sachs economist Tushar Poddar, who recently pared his full fiscal year growth forecast to 5.7% in contrast to the central bank's expectation of 6.5% expansion, saw more tough times ahead.

"Weak monsoons are also likely to impact rural consumption demand and exacerbate weakness in investment demand," Poddar said ahead of the data.

Citibank has said if a nationwide drought is declared, which would be the country's third in a decade, growth could be as low as 4.9% as hundreds of millions of farmers depend on the annual rains for their income.

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