IIP slips to 1.3 pct, slowest in a decade

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New Delhi, October 10:: India's industrial output grew at its slowest pace in nearly 10 years in August, indicating high interest rates were crimping demand, and analysts said the central bank was likely to focus on easing liquidity conditions.

Production rose a paltry 1.3 per cent in August from a year earlier, well below a forecast of 6.1 per cent and July's upwardly revised 7.4 per cent, data showed on Friday.

"This shows signs of a severe slowdown... the number is way below expectations," said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.

"We need to look at the data for the next few months, but given this present statistics combined with the financial situation, it can be said that India's growth will now be closer to 7 per cent," she said.

Industrial output is geared mostly to the domestic market and contributes about a fifth of gross domestic product.

The latest data comes at a time when India is grappling with a cash squeeze due to the global financial crisis, a sliding stock market and rupee, and inflation which is still close to 12 per cent.

The central bank lifted its key lending rate, the repo rate, to 9.0 per cent at the end of July, its highest in seven years.

It said on Friday it would cut the cash reserve ratio (CRR) for banks by 1.5 per centage points to 7.5 per cent, effective Saturday, to alleviate the cash squeeze, but analysts the global market turmoil would complicate its fight against inflation.

Manufacturing output rose a mere 1.1 per cent from a year earlier while capital goods, a key barometer of industrial activity, rose only 2.3 per cent from 30.8 per cent in the same month a year ago.

Indian policymakers have said they are watching the global financial crisis closely, will react swiftly to the needs of the market and will take steps to pump in cash if required.

Finance Minister Palaniappan Chidambaram has said the fundamentals of Asia's third-largest economy are strong and growth in the current financial year would be close to 8 per cent. But private economists forecast expansion will slow to about 7.5 per cent this fiscal year from 9 per cent last year. Growth in the June quarter slipped to an annual 7.9 per cent, the slowest in 3-½ years.