The October figure released by the government on Dec. 12 marked a sharp slump from the 1.9% expansion posted in September, and was the first contraction in output for more than two years.
Manufacturing production, which accounts for around 75% of the industrial index, declined 6% year-on-year, while mining output was down 7.2% and capital goods output plunged 25.5%.
Chandrajit Banerjee, director-general of the Confederation of Indian Industry (CII) said the latest data was a "serious disappointment" that showed a severe industrial slowdown.
"The sharp decline in the capital goods sector is of particular concern, as it indicates a lack of investments, which will continue to be a drag on growth," Banerjee said.
The sluggish output figures are likely to further undercut hopes that emerging markets such as India can power global growth as Europe and the United States struggle.
Siddhartha Sanyal, director and chief India economist with Barclays Capital in India's financial hub, Mumbai, said the data had taken analysts by surprise. "The actual numbers turned out to be significantly weaker than our expectations," said Sanyal. "Every sub-segment had a decline, which makes the situation worse. There's obviously quite a bit of pressure on the industrial segment."
The weak figures buttressed expectations that India's hawkish central bank might ease off on its tight monetary policy aimed at combating inflation, which remains stubbornly high at nearly 10%. A quarter-point interest rate rise by the Reserve Bank of India (RBI) in October was the 13th increase since March last year.
The rupee has meanwhile hit record lows against the U.S. dollar, as overseas investors abandon emerging markets and seek safe havens against global shocks.
In its mid-year analysis of the economy last week, the finance ministry slashed its economic growth forecast for 2011-12 to 7.5%, from a February estimate of 9%. The economy grew 8.5% in the previous financial year.
Some private economists tip expansion this year to be as low as 6.5%, with the country shifting to a new, slower growth trajectory.
Rupa Nitsure, chief economist with the state-run Bank of Baroda, said sentiment was being dampened by a growing perception that India was falling behind other BRICS emerging economies -- Brazil, Russia, India, China and South Africa -- when it came to economic reforms. "Today's news will put a lot of pressure on the government to tackle the issue of reforms," Nitsure said.
"India is now part of the global economy and a lot of negative reports have started coming out, including one recently from Goldman Sachs that said India was the worst performing out of the BRICS nations on reform," she added.
Copyright Agence France-Presse, 2011
India Industrial Output Growth Hits Two-year Low