India's industrial output contracted for the third time in four months in June, increasing pressure on new finance minister Palaniappan Chidambaram to move quickly to pull Asia's third-largest economy from its worst slowdown in almost a decade.
The contraction provided further ammunition to the slew of private economists who downgraded their growth outlook for India this week, citing a worsening drought and political hurdles to economic reform.
"The data bodes ill for Q2 (FY Q1) GDP growth which may well remain below 6% year-on-year. It highlights continued softness of the Indian economy amid contracting exports and weaker domestic demand," said Dariusz Kowalczyk, an economist with Credit Agricole CIB in Hong Kong.
Industrial output in June shrank 1.8%, driven down by a deep dip in manufacturing, the data released on Thursday showed. The number was lower than a forecast of 1.0% growth in a Reuters poll and sharply lower than 9.5% growth a year earlier.
Economic growth faltered to a nine-year low of 5.3% in the quarter ending in March, with corporate investors deterred by high interest rates and a policy gridlock.
Several economists this week cut their full-year growth forecast for India to around 5.5% -- which would be the slowest rate in 10 years.
India's industrial output data is volatile but is still considered a barometer of GDP growth. May's figure was revised to 2.5% from 2.4%, the data showed.
Manufacturing, which constitutes about 76% of industrial production, shrank an annual 3.2% from a year earlier, the federal statistics office said.
Markets dipped after the unexpected contraction.
The rupee was last trading at 55.15 per dollar compared to around 55.08 before the data, though that was still stronger than its 55.42/43 close against the dollar on Wednesday.
The benchmark 10-year bond yield fell about 2 basis points to 8.11% from levels before the data.
Capital goods, a key investment indicator that has shown growth only once in the past 10 months, slumped 27.9% in June, data on Thursday showed.