India?s industrial output grew at a two-year low of 1.9% in September due to a contraction in mining output and poor performance in manufacturing, Central Statistical Office data said on Friday. The uncertainty in developed markets seemed to put the brakes on the economy’s growth momentum, causing analysts to fear that external factors could have a greater impact on India.

The deceleration in industrial growth, partly ascribed to the high cost of funds, might strengthen the case for the Reserve Bank of India, which has been pursuing a tight monetary policy for the last 20 months, to pause.

Taking a cue from the index of industrial production (IIP) data, the Prime Minister’s Economic Advisory Council (PMEAC) lowered its IIP growth forecast for the full fiscal from 7.1% to 6%. The council had last month lowered its growth projection for the economy to ?close to 8%? from its July forecast of 8.2%.

RBI deputy governor Subir Gokarn said the impact of rate hikes is visible on growth, which could be 7.5-7.6% this fiscal. ?Numbers show a pretty sluggish second quarter,? he said.

PMEAC chairman C Rangarajan, however, told FE that IIP could pick up in the second half thanks to a likely pick-up in mining output and a rise in public sector investments. Plan panel deputy chairman Montek Singh Ahluwalia said ?the short-term interest rate? was not the sole reason for slow industrial growth.

Pertinently, August IIP growth was revised down from the 4.04% estimated earlier to 3.59%.

Rangarajan said that the RBI may probably leave short-term lending rates untouched so long as inflation shows a declining trend. ?There are indications that by the first quarter of 2012, there would be definite signs of inflation declining,? Rangarajan said.

RBI said in its monetary policy review last month that although inflation had remained stubbornly high at an average of 9.6% so far this fiscal, there is some comfort coming from de-seasonalised sequential quarterly WPI data, which suggest that inflation momentum has turned down. Last month, RBI raised short-term lending and borrowing rates for the 13th time since March 2010, by 25 basis points to 8.5% and 7.5%, respectively.

The sharp decline in industrial production compared with a 6.1% growth in the same month a year ago is due to a 5.6% contraction in mining versus 4.3% growth the same time a year ago. The manufacturing sector, which accounts for about 80% of industrial production, grew at a sluggish pace of 2.1% in September, against 6.9% growth in the year-ago period. Power generation posted a decent 9% growth in the period under review.

The worrying part of the latest figures is the 6.8% negative growth in capital goods, which point to a drying up of fresh investments in the economy. This segment had grown 7.2% in the same month a year ago. Output of consumer goods ? an indicator of consumption ? grew at a slow pace of 3.5% in September, compared to a 9.7% jump in the same time a year ago. Output growth in consumer durables such as television sets and refrigerators grew at 8.7% in September, nearly half the pace recorded a year ago.

Friday’s figures comes after the latest trade figures, which showed October export growth at its slowest in two years, echoing a demand contraction in Europe, the country’s largest trading partner.

?India?s merchandise exports in October rose just 10.8% to $19.9 billion on an annual basis, leaving a four-year-high trade deficit of $19.6 billion.

The government’s revenue receipts in the first half of the fiscal stood only at 37% of the full-year estimate and was lower by 26% from what was collected a year ago in

the same period. Car sales in the country, too, dropped 24% in October, the sharpest decline in more than a decade, as high cost of funds forced consumers to defer purchases.

Crisil director and principal economist DK Joshi said that capital goods output data has been volatile and that it could reverse the trend in the coming months. ?We maintain our GDP growth forecast of 7.6% for the current fiscal,? he said.