MUMBAI, India – India's industrial output fell for the second straight month in December, government data showed Tuesday, adding to worries over a marked slowdown in Asia's third-largest economy, now predicted to grow at its slowest rate in a decade.
The production index measuring manufacturing, mining and electricity edged down 0.6 percent in December from a year earlier, more than the November contraction of 0.1 percent, according to the Central Statistics Office.
India's once-bright economic outlook has been dimming recently amid high inflation, weak consumer spending and delays in economic reforms that have chilled investment. Gross domestic product growth has slumped from over 9 percent in early 2011 to a projected growth of only 5 percent for the fiscal year ending in March.
Falling industrial production seemed to back up that pessimistic GDP forecast issued last week by the statistics office, which sparked an unusual controversy within the government, with Finance Minister Palaniappan Chidambaram saying the gloomy outlook is overblown and 5.5 percent growth is still achievable.
Tuesday's negative production figures may increase pressure on Chidambaram to present a pro-growth budget later this month to try to narrow deficits and introduce reforms to make doing business in India less difficult.
The latest signs of stalling growth might also convince the central bank to further reduce its base lending rates to try to stimulate weak consumer demand, although analyst Anjalika Bardalai with the Eurasia Group says stubbornly high inflation remains the bank's primary concern and she doesn't expect another rate cut more than the quarter point that it did last month.
Inflation of 7.2 percent that outstrips growth is hurting consumers, and lower interest rates could worsen the problem, she said. The government's next report on inflation is due Thursday.
Even a full point interest rate drop from the current 7.75 percent would still make borrowing too expensive to encourage businesses to invest more, she said.
"India needs more than just lower interest rates to kickstart investment again," Bardalai said.
The Congress party-led government is promising financial reforms to reduce the fiscal deficit in the next budget due at the end of February. India also is wrestling with its expensive subsidies for commodities such as fuel that have swelled spending faster than the government can collect revenue, and economists say reforms in business regulations are needed to encourage investors.
Many businesses say they're wary of investing in India because of infrastructure bottlenecks and uncertainty about government policy. The government hasn't been able to expand electricity and transport networks enough to accommodate the previous rapid growth.
Promised government reforms to make doing business easier have stalled. India is ranked a low 132 out of 185 countries in the World Bank's survey of ease of doing business.