Indian industrial output shrinks unexpectedly
India's industrial output shrank unexpectedly in March, official data on Friday showed, piling pressure on policymakers to act swiftly to bolster the economy and dispel deepening investor gloom. Manufacturing, mining and electricity output in Asia's third-largest economy contracted by 3.5 percent in March from a year earlier, sending the Indian rupee falling to near life-time lows against the dollar. "Growth risks have clearly gained prominence... industrial production fell flat on its nose," HSBC's chief India economist Leif Eskesen said. The weak numbers could push the central bank to cut interest rates again soon, economists said, even though India's stubbornly high inflation remains a worry. Manufacturing production shrank by 4.4 percent in March while output of capital goods such as factory equipment -- an important investment measure and portent of future activity -- contracted by 21 percent. The weak numbers came as China's industrial growth slowed to 9.3 percent year-on-year in April, the lowest in nearly three years. The indicators from the emerging market giants undermined hopes they can help power a global recovery. India's downturn has been fed by weakening domestic and international demand, especially from the crisis-hit euro zone, as well as investor concern about government policy paralysis and widespread corruption scandals. For the financial year ending March 2012, industrial production expanded by just 2.8 percent, sharply below its 8.2 percent growth the previous year. Finance Minister Pranab Mukherjee voiced disappointment and conceded "investment recovery remains frail." The central bank reduced borrowing costs in April for the first time in three years in a bid to spur growth but warned scope for more cuts is restrained by still strong inflation nudging seven percent. However, "given the sharp fall in output growth and the dismal investment activity, the bank is likely to ease the policy rates further from June," said Arun Singh, economist at Dun & Bradstreet India. The government has forecast 7.6-percent growth for this fiscal year, up from 6.9 percent last year, but economists' expectations are much lower. "There is a near absolute belief of a sharp downgrade (by the government) in the estimated growth rate to between 6.5 percent to seven percent," Ajay Bodke, investment strategy head at Mumbai's Prabhudas Lilladher, said. While such growth would be the envy of much of the world, experts say at least nine to 10 percent expansion is needed to reduce India's crushing poverty. The economy grew by over nine percent for three years until 2007-08 and the government says it is confident of steering India back to a high growth path. But the failure of Prime Minister Manmohan Singh's government's to enact key reforms and regulatory flip-flops have deterred vital investment needed to boost growth. Doubts are also mounting about India's ability to check a ballooning fiscal deficit amid populist subsidies to help the poor. The worries have put further pressure on India's battered currency which fell by a fifth of a rupee following the output data to a near record low of 53.60 against the dollar. The Bombay Stock Exchange's 30-stock Sensitive Index slid by nearly a percentage point to 16,292.98 points. "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."
