Industrial Output Seen Contracting in October

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December 12, 2013 3:13 PM EST

India's industrial production is expected to have contracted for the first time in four months in October, a Reuters poll showed, a sign the economy remains fragile despite a modest rebound in the September quarter.

A Reuters poll of 26 economists predicted output at factories, mines and utilities shrank an annual 1.2 percent, after rising 2 percent in September.

The production data, due on Thursday, comes on the heels of a marginal pickup in economic growth in the last quarter from a four-year low. Asia's third largest economy expanded an annual 4.8 percent in the quarter through September, raising hopes for stronger growth in coming quarters.

"It would certainly cast doubts on industrial recovery but I would certainly be not throwing in the towel as far as GDP growth optimism is concerned," said Robert Prior-Wandesforde, an economist with Credit Suisse in Singapore.

Hopes of an economic recovery are reliant on higher rural consumer spending after a strong monsoon raised farm output and a rebound in merchandise exports. But they are not enough to take growth back to the 8 percent rate the government says is needed to reduce poverty and generate jobs.

Economic growth virtually halved in two years to 5 percent in the fiscal year that ended in March - the lowest level in a decade in which the Congress party has dominated Indian politics. Most economists surveyed by Reuters in October expect the fiscal year to March 2014 to be worse.

A yawning current account deficit, slow structural reforms and falling confidence among foreign investors underline the difficulty facing policy makers trying to foster a sustainable rebound in growth.

Inflation, in particular, is showing little signs of slowing down. Consumer inflation in November likely stayed at 10 percent, a tad lower than 10.09 percent in October, according to a separate poll of economists.

The inflation data is also due on Thursday.

Stubbornly high inflation, led by runaway vegetable prices, is denting domestic demand by keeping household and corporate budgets under pressure. It has also forced the central bank under Raghuram Rajan to raise interest rates at the last two meetings.

If inflation data matches expectations, it will cement the case for another rate hike at the upcoming monetary policy review on December 18.

"It is going to be hard for Rajan to ignore double-digit consumer price inflation rate," said Prior-Wandesforde, who expects a 25 basis point rate hike on Wednesday.

With growth stuck below 5 percent and prices rising at a fast clip over the last four quarters, some analysts have voiced concerns that India's economy was in the grip of stagflation.

Weak investments lie at the heart of India's economic travails. With national elections looming, few businesses are willing to commit to new spending initiatives.

That's a major worry for the ruling Congress party as it struggles to win back voters with national elections barely five months away. The economic troubles led to a bruising defeat for the party in four of five states that went to polls over the past month.

Opposition prime ministerial candidate Narendra Modi has made reviving the economy a central plank of his campaign.

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