India’s manufacturing slump drives a contraction in June industrial production

India’s industrial output fell a worse-than-expected 1.8 per cent in June, its third fall in four months, as slumping manufacturing and investment darken the outlook for Asia’s third-largest economy.

 A 3.2 per cent fall in manufacturing output drove the decline, data released by the government Thursday showed. Production of capital goods – a sign of investment in things like machinery – fell a worrying 27.9 per cent.

It is a far cry from last June, when mining, manufacturing and electricity output grew by 9.5 per cent.

“Capital expenditure has dried up and manufacturing has now ground to a halt. Consumer demand is still solid, though below potential and is nowhere near enough to make up for the shortfall in business demand,” Moody’s Analytics economist Glenn Levine said in an email.

The poor numbers will put pressure on the central bank to cut its key interest rate even though inflation remains high and New Delhi has not enacted policy reforms –  like raising the diesel price to ease the fiscal deficit –  which the central bank and others say are key to unlocking India’s economic potential.

India’s growth is at its lowest in almost a decade. The central bank recently cut its growth forecast for the year ending March 2013 to 6.5 per cent, but many private sector economists are saying that the economy won’t even attain 6 per cent growth.

Chandrajit Banerjee, director general of the Confederation of Indian Industry called the numbers “a cause for serious concern.”

“Any further decline in GDP growth will have a deleterious effect on employment and on consumer demand,” he said in an email.