India's industrial output rose 7.3% in March on a 12-month basis, its fastest pace in five months, but still far below the levels of last year, data showed on Thursday.
The March figure exceeded analysts' expectations of a 3.8% hike and was higher than growth in February of 3.65%. Expansion remains far below the 15.5% level clocked last year.
Economists were surprised by the sudden spike in industrial activity, but warned that local firms would continue to face difficulty in boosting output because of tight lending practices, as well as rising interest rates and commodity prices.
With industrial activity beginning to pick up, they expect India's hawkish central bank to continue to raise interest rates in coming months, with annual inflation at near 9% -- the highest amongst all major Asian economies.
The Reserve Bank of India this month hiked interest rates for the ninth time in 15 months by a bigger-than-expected 50 basis points, warning that short-term economic growth might have to be sacrificed in the fight against inflation.
"The output data is surprisingly high," said Siddhartha Sanyal, chief India economist with Barclays Capital, who expects the central bank to maintain an aggressive monetary policy stance to tackle the rising cost of living.
The RBI is set to meet June 16, when analysts expect the bank to raise rates again.
Earlier this month, the HSBC Purchasing Managers' Index (PMI), keenly watched as a signal of industrial growth, climbed to 58 in April from 57.9 the previous month. A reading over 50 signals expansion.
India's Finance Minister Pranab Mukherjee said the rise in factory output growth represented the start of a sustained upturn in industrial activity.
"Some improvement has taken place, but I expected a little more," Mukherjee told reporters in New Delhi.
Manufacturing output, which accounts for 80% of the industrial output index, rose 7.9% in March, about half the level of a year ago.
The March data showed that production of capital goods -- such as factory goods or machinery -- grew by 12.9% year-on-year, lower than the same period last year.
Leading lobby group the Federation of Indian Chambers of Commerce and Industry (FICCI) said they feared India's growth was losing traction.
"Growth in the manufacturing sector will slow down in coming months as commercial banks have raised interest rates further which will affect investments in the sector," said FICCI director-general Rajiv Kumar.
"Overall there are many downside risks for India's manufacturing sector in coming months," he said in emailed comments to AFP.
Growth in the production of consumer products also slowed to 12.3% from 32.6% a year earlier, the figures showed.
Prime Minister Manmohan Singh's top economic adviser has cut his estimate for economic growth in the current fiscal year by half a%age point to 8.5%, citing inflationary pressures.
The Indian government has estimated that the economy would grow by 8.6% last year. Figures are due to be released by the end of June.
The government projects 9% growth for the current financial year ending next March.
Mukherjee sees inflation easing to between 7 and 7.5% this fiscal year.
India plans to launch a new industrial output index next month to provide a more realistic picture of industrial activity, economic advisors to the government have said.
The index, which will be based on April data, could have up to 400 items such as manufactured goods and commodities, up from 283 in the current index.
Copyright by Agence France-Presse, 2011