Indian Industrial Output Shrinks Unexpectedly

India's industrial output shrank in March for the first time in five months, data Friday showed, piling pressure on the central bank and other policymakers to act quickly to boost the stumbling economy.

Manufacturing, mining and electricity output in Asia's third-largest economy contracted by 3.5% from a year earlier, defying market expectations of a 1.5% rise.

"Growth risks have clearly gained prominence with today's numbers," HSBC's chief India economist Leif Eskesen said. "Industrial production fell flat on its nose," he added.

The weak numbers could push the central bank to cut interest rates again, economists said, after it reduced borrowing costs last month for the first time in three years in a bid to spur growth.

Manufacturing production shrank by 4.4% in March from a year earlier while output of capital goods such as factory equipment -- a vital investment activity indicator and portent of future activity -- contracted by 21%.

The slowdown gripping India's economy has been fed by weakening domestic and global demand, especially in the sovereign-debt-crisis hit euro zone.

For the full financial year ending March 2012, industrial production expanded by just 2.8%, sharply below its 8.2% growth the previous year.

Finance Minister Pranab Mukherjee voiced disappointment over the numbers and said "investment recovery remains frail."

The central bank last month warned scope for further cuts was curbed by still relatively strong inflation nudging 7%.

But these output numbers may make "a case to cut again," said Credit Suisse Asian Economics Director Robert Prior-Wandesforde.

The Bombay Stock Exchange's 30-stock Sensitive Index fell by around a percentage point after the data before recovering much of its losses to trade down 0.30% at 16,372.05 on investor hopes of fresh rate cuts.

The government has forecast 7.6% growth for this fiscal year to March 2013, up from 6.9% last year, but economists' expectations are far more pessimistic.

"There is a near absolute belief of a sharp downgrade (by the government) in the estimated growth rate to between 6.5% to 7%," Ajay Bodke, investment strategy head at Mumbai's Prabhudas Lilladher, said.

The data comes as Prime Minister Manmohan Singh's Congress-led government is battling a series of corruption scandals that have stalled crucial reforms to open up the economy in such key areas as retail and insurance.

Regulatory flip-flops have added to the economic gloom, deterring vital foreign and domestic investment needed to improve India's shabby infrastructure which has been creating supply bottlenecks and curbing growth.

Doubts have also been mounting about the government's ability to check a ballooning fiscal deficit amid higher fuel subsidies and populist job, food supply and other measures to help India's hundreds of millions of poor.

All this has piled pressure on India's rupee which has slid by nearly a fifth in the past year.

"A strong perception of policy paralysis has taken root among both local as well as foreign investors, Prabhudas Lilladher's Bodke told AFP. "A lot more needs to be done in terms of improving the economic environment."

Copyright 2012, Agence France-Presse

See also:

India's Trade Deficit Hits Record High Despite Rise in Exports