India factory output dips 3.5% as manufacturing shrinks

A worker at a factory in India The manufacturing sector is one of the biggest contributors to India's economic growth

India's industrial production fell unexpectedly, led by a drop in manufacturing, raising concerns about a slowdown in its economy.

Factory output fell 3.5% in March from a year earlier, down from 4.1% annual growth in February.

The data comes amid fears that a global slowdown coupled with domestic economic issues may hurt India's growth.

Analysts warned that the weakness in manufacturing may continue unless the government takes steps to boost growth.

"The data is much weaker than expected," said Rajeev Malik an economist with CLSA. "The government needs to wake up and do something sensible for investments."

Policy easing?

The slowdown in the manufacturing sector has had a negative impact on India's economic growth.

Start Quote

We are of the view that incrementally RBI will have to cut rates more and sound dovish”

End Quote Siddhartha Sanyal Barclays Capital

The Indian economy saw its weakest growth rate in nearly three years during the last quarter of 2011, expanding by 6.1% between October and December from a year earlier.

Prompted by the slowdown and fears that growth may be hurt further, India's central bank made a surprise move to cut its key interest rate by half a percentage point last month.

The Reserve Bank of India (RBI) lowered the cost of borrowing to 8% from 8.5% in an attempt to boost growth.

Analysts said the latest fall in industrial production was likely to lead to a further cut in rates, though the central bank may not move for a couple of months.

"We are of the view that incrementally RBI will have to cut rates more and sound dovish," said Siddhartha Sanyal, chief India economist of Barclays Capital.

"RBI will have a bias to not cut rates till July, but may have to start after that. We expect another 50-75 basis points rate cut in this year."

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