Industrial output for April, measured by a more representative data set, reinforced bad news for the economy that inflation and costlier loans are taking a toll.

Measured by the new series, released simultaneously with the monthly figures, the Index of Industrial Production has logged only 6.3% growth in April against 13.1% in April 2010.

Finance minister Pranab Mukherjee described the slow pace of growth as disturbing but added it will be necessary to watch the IIP growth for some more months to see a trend.

While the new series has reduced the weight for manufacturing in the index, that has not changed the overall sense of declining investment trends in the economy. The trend was also flagged by Prime Minister?s Economic Advisory Council chairman C Rangarajan in a meeting with industry on Thursday. Rangarajan said despite a 22% rise in credit from the banking sector, the rate of growth of industry was slowing.

Economists said that despite the decline in factory output, they still expect the Reserve Bank of India (RBI) to increase its policy rate by 25 basis points at its June 16 monetary policy review, as the central bank’s focus is still on inflation control.

The worrying aspect is the slower growth in capital goods production. It grew at 14.5% in April, compared with 35.5% a year ago. This is, however, better than the growth rate measured by the old series, which shows a paltry 2.5% growth in April compared with a 64% surge a year ago.

The slowing down of investments comes against the backdrop of rising borrowing costs since the beginning of last fiscal. Last month, the RBI raised rates by 50 basis points and said it was willing to sacrifice a bit of growth to tame inflation. Since March 2010, the central bank has raised its policy rate by 2.5%.

The old IIP with 1993-94 as the base year shows an even worse slowdown in the rate of industrial growth in April to 4.4% from a high of 16.6% the same month a year ago, said the ministry of statistics and programme implementation.

The new series has 2004-05 as the base year and represents more recent production behaviour and is a closer reflection of the present industrial scenario, the ministry of statistics and programme implementation said.

?The conclusion to be drawn from the new IIP data series is that the previous series had understated industrial growth as it did not cover certain fast growing segments,? said Crisil director and principal economist DK Joshi. The old series pegged last fiscal?s industrial output growth at 7.8%, while the new one recorded it at 8.2%. Joshi expects the RBI to raise repo and reverse repo rates by 25 basis points and expects an average industrial output growth of 7.3% in the current fiscal.

As per the new IIP series, the manufacturing sector, which accounts for a lower three-fourths of the total industrial output, grew at a disappointing 6.9% in April, against a 14.4% expansion in the same month a year ago. Earlier this month, the HSBC Markit Purchasing Managers? Index, an indicator of manufacturing expansion, recorded a drop to 57.5 in May from 58.0 in April. Mining output expanded at 2.2% in April, against a 9.2% growth the same time a year ago.

The high borrowing cost has also started adversely impacting demand as indicated by an unimpressive 2.9% growth in consumer goods output in April, compared with 13.8% a year ago. Within that, the consumer durables category recorded a 3.8% growth in the month against 23.3% a year ago, while consumer non-durables grew at 2.1% in April against 6.8% in the same month a year ago.

Ficci president Harsh Mariwala said, ?The growth of consumer goods sector has remained within the range of 0-3% since February 2011. We may see further impact of higher interest rates on consumer loans and demand in coming months. In fact, on a sequential basis, growth of the consumer durables sector was negative in April 2011 compared to March 2011.?

Sudhakar Shanbhag, chief investment officer, Kotak Mahindra Old Mutual Life Insurance Limited, said though currently the bias is to control inflation, the growth numbers need to be watched closely as well since the tightening over the last 12 months will start showing an impact now and over the next few quarters.