India's industrial output unexpectedly contracted by 0.4% in October after expanding by 12.2% in the same month a year earlier, official data showed on Dec. 12. This was the first time in 15 years the economy has contracted.
November's outlook also appeared bleak with preliminary data "pointing towards the likelihood of industrial growth contracting again," Yes Bank chief economist Shubhada Rao said. The data bucked analysts' forecasts that output would grow by 2%.
India had believed it would escape the brunt of the global turmoil thanks to its vast domestic market of 1.1 billion people and relatively small exposure to world trade. But a slew of figures have shown the economy fast losing steam.
India plans to unveil a second economic stimulus package, probably next week, Commerce Minister Kamal Nath said on Dec. 11, after authorities announced last weekend $4 billion in extra spending and interest rate cuts.
Companies say more needs to be done to kick-start the economy and analysts say India's stimulus efforts pale next to China's $586 billion package. But unlike China, India, which has one of the world's highest combined state and federal deficits, has no room for a fiscal "big bang," economists say.
"The government will continue to focus on some counter-cyclical fiscal measures, but the key reliance will be on aggressive monetary easing," said Rajeev Malik, economist at Macquarie Securities, who forecast another big interest rate cut by early January.
Industrial output fell as companies worked off inventories built up in anticipation of October's usually free-spending religious festival season that proved disappointing with lower sales of cars and other goods.
Exports in October also tumbled for the first time in three years.
"The worst is yet to be seen," said Sherman Chan, economist at Moody's.com. "Losing support from external sectors, India is unlikely to see a rebound in manufacturing output any time soon."
Earlier this week, car sales posted their biggest annual fall in eight years, tumbling by 19% in November while truck and other commercial vehicle sales -- a crucial signal of future economic activity -- slumped by 50%.
Government officials have projected growth of 7% to 8% for the year to March 2009, down from at least three years of 9% growth, and say it could bounce back to 9% next year. But many economists see growth of around 6.8% this year and as low as 5.5% next year.
Copyright Agence France-Presse, 2008