India's industry stalls as economic woes mount

India's industrial output grew just 0.1 percent in April year-on-year, official data showed Tuesday, adding to concerns about the economy and raising the chances of an interest rate cut next week.

The manufacturing sector, which accounts for three-quarters of the industrial production index, expanded a weaker-than-expected 0.1 percent, while production of capital goods, a key indicator of investment, shrank 16.3 percent.

"Frankly speaking I am disappointed and industry has not yet picked up," Finance Minister Pranab Mukherjee told reporters after a meeting with leading industrialists.

"The negative sentiments for investment which is continuing for some time are still there," he added, reiterating a promise of steps to send positive signals to investors such as quicker clearances for projects.

The data adds to an increasingly gloomy picture of the once-booming Indian economy, which analysts say has been hit by a lack of economic reforms, high interest rates, plummeting business confidence and the eurozone debt crisis.

Ratings agency Standard & Poor's warned Monday that India could be the first of the BRIC emerging economies to lose its investment-grade debt classification unless it revived growth and rekindled its reform agenda.

In April, the firm changed India's credit outlook to negative from stable, maintaining its rating at "BBB-" but warning it faced at least a one-in-three chance of a downgrade if its public finances worsened.

Forecasters polled by Dow Jones Newswires had expected the index of industrial production (IIP) to increase 1.0 percent in April, a modest turnaround after a shock contraction of 3.5 percent in March.

The new statistics come on the heels of figures published on May 31 showing the Indian economy expanded 5.3 percent in the January-March period, the slowest quarterly growth figure in nine years.

After a decade of scorching near-double-digit economic growth, there is growing alarm that India is sliding back towards its much-derided growth rate of 5.0-6.0 percent in previous decades.

The government says India needs higher growth to lift its overwhelmingly poor 1.2-billion population out of poverty and provide the estimated 8-10 million new jobs needed every year to absorb the expected growth in the labour force.

"The April IIP figures of 0.1 percent reconfirms our view that Indian industry is in the midst of crisis and business sentiments are indeed very low," said Rajiv Kumar, the secretary general of business lobby group FICCI.

The organisation urged the government "to take bolder decisions" while rival lobby group ASSOCHAM met Prime Minister Manmohan Singh and handed him a letter pressing for reform and a cut in interest rates.

India's central bank holds a policy meeting next Monday where it is expected to cut interest rates again, having raised them 13 times between March 2010 and October 2011.

"The weak industrial production number we have and the generally subdued growth and lower oil prices will add more pressure on the central bank to cut rates next week," HSBC Asia analyst Leif Eskesen told local television.

India's Sensex stock index rose 1.17 percent to 16,862.80 points on Tuesday on growing hopes for the rate cut.

Eskesen cautioned, however, that "I don't think easing policy rates is the right instrument to improve the growth rate in India".

Lower interest rates are likely to result in higher inflation, already at 7.0 percent on an annual basis, many analysts believe.

India suffers from poor infrastructure and other structural constraints, but the government's ability to stimulate the economy is limited because of a gaping fiscal deficit and mounting pressure to rein in spending and subsidies.

Prime Minister Singh's left-leaning administration has also been unable or unwilling to push through economic reforms such as opening up the retail sector to foreign investment because of disagreements in his coalition.

Officials and Singh's Congress party took aim on Tuesday at Standard & Poor's warning about India's credit rating.

"This is its personal views," Congress spokesman Manish Tiwari told reporters. "As far as the fundamentals of India's economy are concerned, its foundations are stable."

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