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India’s industry stalls as economic woes mount

India’s industrial output grew just 0.1 percent in April year-on-year, official data showed Tuesday, adding to concerns about the economy and raising the chances of an interest rate cut next week.

The manufacturing sector, which accounts for three-quarters of the industrial production index, expanded a weaker-than-expected 0.1 percent, while production of capital goods, a key indicator of investment, shrank 16.3 percent.

“Frankly speaking I am disappointed and industry has not yet picked up,” Finance Minister Pranab Mukherjee told reporters after a meeting with leading industrialists.

“The negative sentiments for investment which is continuing for some time are still there,” he added, reiterating an earlier promise of unspecified “steps” to send positive signals to investors.

The data adds to an increasingly gloomy picture of the once-booming Indian economy, which analysts say has been hit by a lack of economic reforms, high interest rates, plummeting business confidence and the eurozone debt crisis.

Forecasters polled by Dow Jones Newswires had expected industrial production to increase 1.0 percent in April, a turnaround after a shock contraction of 3.5 percent in March.

The new data comes on the heels of figures published on May 31 showing the Indian economy expanded 5.3 percent in the January-March period, the slowest quarterly growth figure in nine years.

After a decade of scorching near double-digit economic growth, there is growing alarm that India is sliding back towards its previous expansion rate of 5.0-6.0 percent.

The government says India needs higher growth to lift its overwhelmingly poor 1.2-billion population out of poverty and provide the estimated 8.0-10 million new jobs every year to absorb the expected growth in the labour force.

“The April IIP (Index of Industrial Production) figures of 0.1 percent reconfirms our view that Indian industry is in the midst of crisis and business sentiments are indeed very low,” said Rajiv Kumar, the secretary general of business lobby group FICCI.

The organisation urged the government “to take bolder decisions and at a much faster pace to push forward reforms for a quick turnaround in the industrial growth”.

In contrast to the woes in India’s industrial sector, output from China’s factories grew 9.3 percent in April on a 12-month basis and 9.6 percent in May, the government said at the weekend.

Next Monday, India’s central bank holds a policy meeting where it is expected to cut interest rates again, having raised them 13 times between March 2010 and October 2011.

“The weak industrial production number we have and the generally subdued growth and lower oil prices will add more pressure on the central bank to cut rates next week,” HSBC Asia analyst Leif Eskesen told local television.

India’s Sensex stock index rose 1.17 percent to 16,862.80 points on Tuesday on growing hopes for the rate cut.

Eskesen cautioned, however, that “I don’t think easing policy rates is the right instrument to improve the growth rate in India”.

Lower interest rates are likely to result in higher inflation — already at 7.0 percent on an annual basis — because of India’s poor infrastructure and other structural constraints, many analysts believe.

But the government is also unable to stimulate the economy because of a gaping fiscal deficit and increasing pressure to rein in spending and subsidies.

The left-leaning administration of Prime Minister Manmohan Singh has also been unable or unwilling to push through economic reforms such as opening up the retail sector to foreign investment because of disagreements in the coalition.

Rating agency Standard & Poor’s warned on Monday that India could be the first of the BRIC emerging economies to lose its investment-grade debt rating unless it revived growth and rekindled its reform agenda.

In April, the firm downgraded India’s credit outlook to negative from stable, maintaining its rating at “BBB-” but warning it faced at least a one-in-three chance of losing its status if its public finances worsened.