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Indian industrial yield in shock contraction

India’s industrial output shrank by a shock 1.8 per cent in June, data showed on 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 per cent from a year earlier in June, according to government figures.

Chidambaram called the numbers “disappointing” and said he would act in “double-quick time” to remove bureaucratic and other bottlenecks hindering India’s production.

“We intend to find practical solutions,” he said.

The industrial output fall defied market forecasts of close to one per cent growth and came as the country faces the spectre of its third drought in a decade, which would further reduce economic expansion.

“This was another shocking industrial production release from India... and will inevitably heap more pressure on the central bank to restart its rate cutting,” said Credit Suisse economist Robert Prior-Wandesforde.

India’s once-booming economy grew just 5.3 per cent between January and March — its slowest annual quarterly expansion in nearly a decade.

Unlike other central banks which have been cutting rates to spur growth, the Reserve Bank of India, or RBI, has been holding back on reducing borrowing costs, saying it wants inflation running at over seven per cent 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.

India’s benchmark Sensex share index closed down a fifth of a per centage point to 17,560.87 points on the back of the data.

The next quarterly growth figures are due at the end of the month but “the omens are not particularly encouraging”, said Prior-Wandesforde. —