Improved consumer demand helped industrial output expand 0.1 percent on year in January, the first growth in four months, data from the federal statistics ministry showed on Wednesday.
Analysts polled by Reuters had forecast a contraction of 0.6 percent in output. The fall in December's output was revised to 0.17 percent on year from 0.6 percent earlier.
Separately, retail inflation eased for the third straight month to a 25-month low of 8.10 percent in February from 8.79 percent in the previous month on moderating vegetable prices.
"Today's data show India's beleaguered economy moving in the right direction, but still far from healthy," said Miguel Chanco, India Economist at Capital Economics in Singapore.
The data showed production of consumer goods, a proxy for consumer demand, contracted an annual 0.6 percent in January, an improvement from a 4.7 percent drop a month ago.
Asia's third-largest economy has been struggling to recover from a stagflation-type situation where economic growth has been stuck below 5 percent for the past seven quarters while price continue to rise at a fast clip.
Cooling prices will offer some relief to the government headed by the Congress party, which is trailing in opinion polls ahead of the polls that begin on April 7. It is still widely expected to be defeated, in part for its failure to control inflation and revive the economy.
Hail and heavy rains in the past two weeks have damaged crops, which could see food prices spike again. An uncertain outlook for this summer's monsoon rains due to the El Nino weather pattern is also worrying analysts.
"Food ... prices are going to go up again because of unseasonal rains and hail storms in some parts of the country," warned D.H. Pai Panandiker, president of RPG Foundation, a private think tank.
"It appears that food prices will start going up in the next weeks as agricultural output may suffer."
Purchasing managers indexes are already pointing to underlying inflationary risks as rising input costs last month, thanks to higher raw material prices and wage increases, forced firms to pass on them to their clients.
This is likely to keep retail inflation elevated. Retail inflation has been averaging around 10 percent for the past two years, way above a target of 4 percent recently proposed by a central bank panel.
In an attempt to quell price pressures, new Reserve Bank of India (RBI) chief Raghuram Rajan has raised interest rates three times since September, even though economic growth is languishing at around a decade-low of 4.5 percent. The central bank is next due to review rates on April 1.
"Even with tepid growth and falling inflation, the Reserve Bank of India is unlikely to lose its focus on managing inflation expectations," analysts at Barclays wrote in a note after the data.
Elevated prices and a slowing economy have pressured household budgets and company profits, hitting consumer demand as well as corporate investments.
Contracting industrial output and investment growth that is on track to hit an 11-year low pulled down economic growth to a worse-than-expected 4.7 percent in the quarter to December.
The majority of the chief executives of Indian firms expect the economic situation to remain unchanged over the next six months, a survey carried out by an industry chamber showed this week. Many firms are wary of committing fresh investments before the election outcome is known.
This leaves election spending, estimated to be as high as 0.5 percent of gross domestic product (GDP), as the main hope for a growth uptick.
Easing inflation, marginal factory growth raise rate cut hopes
(PTI) Retail inflation easing to a 25-month low of 8.1 per cent in February and a slight improvement in industrial growth have raised hopes for a rate cut by the Reserve Bank next month to boost economic activity.
Industrial output entered positive territory in January with a modest growth of 0.1 per cent after contracting for three months in a row.
Encouraged by the improvement in the price situation, India Inc stepped up its demand for a rate cut by the Reserve Bank in its monetary policy scheduled on April 1.
As per Consumer Price Index data released today by the Central Statistics Office, easing of onion and potato prices pulled the retail inflation rate lower in February.
Overall inflation in the food basket, including beverages, slowed to 8.57 per cent in February from 9.9 per cent in the previous month, according to the data.
"This should spur the RBI to give a predominance to growth and cut interest rates in its forthcoming monetary policy as the negative growth of capital and consumer goods, especially consumer durables, reinforces the view that escalating interest costs are impeding investment revival," CII Director General Chandrajit Banerjee said.
According to Index of Industrial Production (IIP) data, the marginal improvement in factory output was mainly on account of higher power generation and mining sector output, while manufacturing declined.
Prime Minister's Economic Advisory Council Chairman C Rangarajan said, "IIP data is in line with expectations. There is need for considerable pick up in February-March manufacturing activities."
During the 10-month period from April to January of this financial year, industrial output was flat compared with an over 1 per cent growth in the same period of 2012-13. In January 2013, factory output grew 2.5 per cent.
The contraction in IIP in December was revised to 0.16 per cent from the provisional estimate of a 0.6 per cent dip.
PHD Chamber of Commerce and Industry President Sharad Jaipuria said, "Since WPI (wholesale price) inflation and CPI inflation are in the softening trend and subsiding month after month, RBI at this juncture should come forward to reduce the policy rates and help the industrial activity to recover at a faster pace."
According to the data, factory output started to decline in October with the IIP contracting 1.6 per cent and continued till December.
Power generation posted a growth of 6.5 per cent in January, compared with 6.4 per cent in the same month of 2013. Expansion in power generation was 5.7 per cent in April-January from 4.7 per cent a year ago.
The mining sector, with a weight of about 14 per cent in IIP, grew 0.7 per cent in January as against a dip of 1.8 per cent in the same month in 2013. During April-January, mining output shrank 1.5 per cent as against a dip of 1.8 per cent a year earlier.
The manufacturing sector, which constitutes over 75 per cent of the index, declined 0.7 per cent in January as against growth of 2.7 per cent in the year-ago period. During April-January, the sector's output contracted 0.4 per cent compared with 0.8 per cent growth in the period last fiscal.
Overall, 11 of the 22 industry groups in manufacturing showed positive growth in January.
Consumer goods output declined 0.6 per cent compared with growth of 2.5 per cent a year earlier. During April-January, consumer goods output contracted 2.7 per cent, compared with 2.7 per cent growth in the corresponding period of 2012-13.
The consumer durables segment contracted 8.3 per cent in January as against a decline of 0.7 per cent previously. For the April-January period, the segment declined 12.5 per cent compared with an expansion of 3.3 per cent earlier.
In consumer non-durables, growth was 4.4 per cent compared with 4.6 per cent in January last year and for the April-January period, it was 5.6 per cent versus 2.1 per cent during the first 10 months of 2012-13.
Capital goods production, a barometer of demand, declined 4.2 per cent compared with a contraction of 2.5 per cent in the same month last year. The segment shrank 0.8 per cent in April-January as against a sharp contraction of 9.4 per cent in the comparable period.
The intermediate goods segment expanded at 3.4 per cent in January compared with a growth of 3.5 per cent a year earlier. During April-January, the segment grew 3 per cent compared with 1.8 per cent growth previously.
The basic goods segment grew 0.9 per cent in January, lower than 3.7 per cent in the same month last year, while for April-January, growth was 1.3 per cent versus 2.8 per cent in the year ago period.