India's industrial output grew at its slowest pace in two years in September, providing further evidence of deceleration in the economy and raising the odds of a pause in the RBI's 20-month-old policy tightening cycle.
Production at factories, mines and utilities grew 1.9 percent from a year earlier in September, lower than an downwardly revised 3.6 percent growth a month ago and below the median forecast for a 3.5 percent rise in a Reuters poll.
The manufacturing sector, which contributes about 80 percent to the overall index of industrial production output in Asia's third largest economy, grew an annual 2.1 percent in September.
The drag in the index of industrial production was led by a contraction of nearly 6 percent in mining, 7 percent in capital goods and 1.3 percent in consumer non-durables.
Weak global demand is exacerbating the slowdown in an economy whose growth this year might be well below the 8.5 percent heady pace in the fiscal year that ended in March. Inflation remains persistently high near double-digits despite the long and aggressive monetary tightening that has taken a big toll on investment and consumer spending.
Friday's figures come on top of data this week showing October export growth recorded its worst annual pace in two years while car sales last month declined the most in more than a decade.
"1.9 percent is completely out of expectations. I think it is showing some kind of adverse impact of interest rate hikes. But I am more worried about the volatility in the IIP numbers", said N.R. Bhanumurthy, economist with National Institute of Public Finance and Policy, a Delhi based policy think tank.
Annual exports grew only 11 per cent in October, reflecting a demand contraction in Europe, India's largest trading partner. High interest rates and vehicle costs led to a 23.8 per cent annual decline in car sales in October.
The Reserve Bank expects the economy to grow 7.6 per cent this year, the lowest in 3 years. Some private economists expect economic growth to be lower than the central bank's projection.
Weak Finances, Widening Deficit
A slowing economy is squeezing federal finances and analysts are questioning the government's ability to restrict the fiscal gap for the financial year ending in March 2012 at the budgeted level of 4.6 per cent of gross domestic product (GDP).
Slowing tax revenues, along with stalled share sales in state-run firms hurt by depressed market conditions, have added to the government's woes.
Many private economists see the deficit for the year overshooting the five per cent mark. The RBI has warned of inflationary risks if the government's deficit for the current year ending in March exceeds the budget target.
As headwinds to global growth gain pace, several central banks around the world have begun to cut interest rates to shield their economies.
The Reserve Bank of India (RBI) has so far been an outlier and has continued with its tight monetary stance, citing persistently high inflation.
However, in an acknowledgement of mounting risks to economic growth, the RBI last month signalled a pause in the rate tightening cycle after raising interest rates 13 times since March 2010 to control inflation that has stayed above 9 per cent for nearly a year.
Low export numbers in October have widened the trade deficit to a four-year high of $19.6 billion. The trade ministry sees the trade deficit for the full year in excess of $150 billion, but expects a slowdown in imports in the last few months of the current fiscal.
This in turn may widen current account deficit for the year to 3 per cent of GDP from 2.6 per cent last year.
The partially convertible rupee has been the worst performing currency in Asia so far this year, having shed more than 9 per cent against the dollar.