India May industrial output slides surprise 1.6%

NEW DELHI (AFP) – India's industrial output shrank by a shock 1.6 percent in May from a year ago, official data showed Friday, adding to mounting gloom for Asia's third-largest economy.

The year-on-year output contraction by India's factories, mines and utilities undershot market expectations of a 1.5-percent rise, according to a poll by Dow Jones Newswires.

In another blow, industrial output growth for April was revised down to 1.8 percent from 2.8 percent reported earlier.

The surprise figures were more grim reading for Prime Minister Manmohan Singh's Congress-led government which is anxious for signs of a growth turnaround before fighting general elections due in the first half of 2014.

Despite the weak output, the central bank is ill-placed to cut interest rates to kickstart the economy.

The rupee is hovering at lifetime lows and separate data released Friday showed retail price inflation climbing to 10.13 percent in June from 9.65 percent in May.

The economy has been struggling under the weight of high interest rates, uncomfortably strong consumer inflation and weak domestic and foreign investment, as well as a string of corruption scandals.

The scandals have stalled the government's economic reform agenda after a blitz of liberalisation initiatives last year.

While the central bank has cut rates three times since the start of the year following an aggressive hiking spree, borrowing costs remain high.

The data showed that manufacturing, which accounts for three-quarters of the Index of Industrial Production, fell by 2.0 percent in May from a year earlier.

The government has forecast that the economy will grow by at least six percent in the financial year that began April 1, after expanding by five percent last year -- its slowest pace in a decade.

But private economists have been reducing their forecasts in the past few months with most seeing growth in the five-to-six percent range.