India Output Shrinks Prices Jump in Double Economy Blow

India Output Shrinks, Prices Jump in Double Economy Blow

Manufacturing output, which accounts for over three-quarters of the Index of Industrial Production, shrank by 2% in October.

NEW DELHI -- India's industrial output shrank by a surprise 1.8% in October from a year earlier and consumer inflation accelerated to a nine-month high, data showed Thursday, dealing a double blow to recovery hopes for Asia's third-largest economy.

The output fall, which exceeded market forecasts of a 1.1% decline, was the first contraction in four months and the second weakest number since the start of the year.

Manufacturing output, which accounts for over three-quarters of the Index of Industrial Production, shrank by 2% in October, the statistics ministry data showed.

Business reacted with dismay to the numbers with Chandrajit Banerjee, director general of the Confederation of Indian Industry saying the output shrinkage "casts a shadow on hopes that the economy has bottomed out."

Consumer price inflation, fueled by rocketing food costs, climbed in November to a higher-than-expected 11.2% and stoked expectations of another interest rate hike at a monetary policy meeting scheduled December 18.

The figures were grim reading for the scandal-scarred Congress government which has been hoping for an economic turnaround before general elections due in May.

Reserve Bank of India governor Raghuram Rajan said the central bank was "very uncomfortable" with the inflation level but added economic growth was also "weaker than we would like."

India's economy grew at a decade low of five percent in the last financial year to March 2013, due in part to high interest rates to combat high inflation that has slowed borrowing and spending.

Finance Minister P. Chidambaram has said he expects the economy to expand by 5% again this year but a number of economists forecast growth in the 4% range.

Exports have picked up on the back of a depressed rupee. However, economists say higher overseas sales can only help the economy at the margins, since growth in the nation of 1.2 billion people is still mainly domestically driven.

Despite calls by business for cheaper loans to revive the economy, the central bank has raised its benchmark lending rate twice since September, taking it to 7.75%, to curb inflation.

Economists said another 25 basis point hike might come at the December monetary policy meeting.

"Inflation is clearly clashing with growth and while weakening growth needs rate cuts to prop it up, high inflation doesn't permit rate reductions," said Dharmakirti Joshi, chief economist at leading Indian credit rating agency Crisil.

"The economy is stuck between a rock and hard place, making it an extremely challenging time for monetary policymakers," Joshi said.

Inflation has created huge hardship for India's hundreds of millions of poor. Vegetable prices soared by 62% in November from a year earlier, Thursday's data showed.

Copyright Agence France-Presse, 2013

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