India’s industrial output shrank by a shock 1.8 per cent in June, data showed Thursday, highlighting the challenge for new finance minister P. Chidambaram to reverse the nation’s sharp growth slowdown.
Manufacturing output, which accounts for three-quarters of the Index of Industrial Production, was chiefly to blame, falling 3.2 percent from a year earlier in June, according to government figures.
The industrial output fall defied market forecasts of growth of close to one per cent and came as the country faces the spectre of its third drought in a decade that would further reduce growth.
“This was another shocking industrial production release from India... and will inevitably heap more pressure on the central bank to re-start its rate cutting,” said Credit Suisse economist Robert Prior-Wandesforde.
India’s once-booming economy grew just 5.3 percent between January and March — its slowest annual quarterly expansion in nearly a decade.
The next quarterly growth figures are due at the end of the month but “the omens are not particularly encouraging,” said Prior-Wandesforde.
The June shrinkage in output by factories, mines and utilities was the third contraction in four months and followed a revised 2.5 percent production rise in May.
Capital goods output, a vital investment signal, slid 27.9 percent in June — the largest contraction on record according to Credit Suisse.
Manufacturing in Asia’s third-largest economy has been undermined by high interest rates to combat stubbornly high inflation of over seven per cent, and Europe’s debt crisis which has hit exports.
Unlike other central banks which have been cutting rates to spur growth, the Reserve Bank of India (RBI) has been holding back on reducing borrowing costs, saying it wants inflation to ease first.
“The situation calls for urgent policy measures both by the RBI as well as the government to salvage industry from further decline,” said Chandrajit Banerjee, director general of the Confederation of Indian Industry business group.
Indian shares slipped slightly on the release of the data, then steadied on investor hopes that it might spur future rate cuts.
Chidambaram, named finance minister last week, has pledged to restart India’s “growth engine” and has already indicated he wants lower rates, saying “sometimes it is necessary to take carefully calibrated risks”.
But analysts have been sceptical about how much he can achieve with the left-leaning Congress government under pressure after a string of graft scandals and parliamentary gridlock over its attempts to liberalise the inward-looking economy.