There is more disappointing news for the slowing Indian economy. The Index of Industrial Production (IIP) for the month of October contracted to 5.1% versus a growth of 1.9% in September. IIP was dragged down by fall in capital goods, manufacturing and mining sector.
Manufacturing output, which contributes about 76 percent to industrial production, fell an annual 6 percent in October, reflecting weak consumer demand at home and overseas.
Production at mines fell 7.2 percent, hurt by policy and regulatory uncertainties.
Consumer non-durables output shrank an annual 1.3 percent, while capital goods production -- a barometer of investment in the economy -- plunged 25.5 percent.
During April-October, industrial production expanded 3.5 percent. The output had grown 7.8 percent in the 2010/11 fiscal year that ended in March, slower than 10.5 percent clocked in the previous year.
Stocks extended their losses to 0.7 percent after the data, while bonds, swaps and the rupee were little changed.
C Rangarajan of PMEAC, said that the data was disappointing particularly that of capital goods. The news should ring alarm bells for a government already grappling with sliding export growth and vanishing capital flows.
AM Naik of L&T, said, "Have been expecting slowdown in IIP and GDP growth." He said that the growth in capital goods space could be slow for the next two years.
Public finances are also under stress with the fiscal deficit, the measure of the government's borrowing, set to widen due to the impact of subsidies. Policy delays and regulatory hurdles have hit the industrial sector hard and investments have slowed as the government has dragged its feet on approvals.
Tim Condon, Head of Asian Economic Research, ING, said: "It is a lot worse than we expected. The nearly two years of monetary tightening is clearly being felt. While India may not be a manufacturing-driven economy, more data prints such as this would be a worrying sign. While we expect a status quo in terms of interest rates from the RBI this week, the pressure is clearly building on them to start easing."
Another major worry for the beleaguered government is the sustained decline in the capital goods sector. The sector, which is a key measure of industrial activity, has remained sluggish for the past few months due to a combination of factors including high interest rates. A slump in this segment indicates that capacity addition is not taking place in the economy and industrial output will face sustained headwinds in the months ahead.
A shrinking industrial sector is expected to adversely impact services and overall GDP which is estimated to expand by around 7% in 2011-12. The Reserve Bank of India's 13 interest rate increases since early 2010 have also taken a toll on the Indian economy.
India's infrastructure output growth slowed to a meagre annual rate of 0.1 percent in October, sharply lower than 2.3 percent in the previous month. The HSBC Markit India Manufacturing PMI fell to 51.0 in November from 52.0 in October, when it had rebounded for the first time in six months.