NEW DELHI, 13 March 2008 — India’s industrial production dropped unexpectedly sharply in January, fueling worries about slowing economic growth in Asia’s third-largest economy.

Annual industrial output growth tumbled to 5.3 percent in January on the back of aggressive monetary tightening after rising by 11.6 percent in the same month last year. Industrial growth grew by a revised 7.7 percent in December.

The across-the-board weakening in the manufacturing, mining and electricity sectors surprised analysts who expected industrial output to quicken by eight percent in January from a year earlier. It also came as unwelcome news for the Congress-led coalition government which faces elections in just over a year.

“Softening in industrial production — if it continues at this pace — would pose a serious problem to the Indian growth outlook down the year,” said HSBC economist Robert Prior-Wandesforde.

The data knocked Mumbai’s benchmark 30-share Sensex index down by 555 points from an intraday peak of 16,683.37 points to close at 16,127.98, up just 0.03 percent or 4.83 points. “The swing in the market was dramatic and caused by the poor industrial production number. There is now caution that the economy could slow sharply in the coming year,” said Vivek Kudva, managing director at Franklin Templeton.

For the first 10 months of this fiscal year to March 31, 2008, industrial production growth slowed to 8.7 percent from 11.2 percent in the same period the previous year.

Among the hardest hit were consumer durables which grew by an annual 3.1 percent in January after rising 5.3 percent last year. Between April and January, consumer durables growth slid to 1.7 percent from 10.6 percent a year earlier.

Rising inflation gives the central bank little room to loosen monetary policy to spur activity, analysts say. Last Friday, inflation hit a nearly 10-month high of 5.02 percent, pushing through the bank’s ceiling of five percent for this fiscal year.

“For now, with inflation increasing and fiscal policy still loose, there is little room for the Reserve Bank of India to reduce rates significantly,” said Goldman Sachs economist Tushar Poddar.

Nine interest rate hikes since 2004 have pushed borrowing costs to near decade highs, hitting consumer demand, and a sharp rise in the rupee against the dollar have hit industrial growth.

The government forecasts economic growth will decrease to 8.8 percent in this fiscal year from 9.6 percent last year — the first deceleration in three years — and it is expected to slow further next year.