India factory output picks up, mild recovery hinted

India's industrial output grew by a surprise 2.4 percent in January, data showed Tuesday, suggesting that Asia's third-largest economy may be on track for a modest recovery.

The increase in January output at India's factories, mines and utilities was more than double analyst expectations of a one-percent increase, after production shrank for two straight months.

"We are on a recovery path, but that recovery will be very slow. There will be no sharp uptick," Siddhartha Sanyal, Barclays Capital's chief India economist, told AFP, a view echoed by other economists.

Any upturn would be welcomed by the Congress-led government which faces voters in polls next year and on whose watch India's once-booming economy has slowed to five percent in the year to March 2013, the weakest in a decade.

But the stronger output data was clouded by other figures showing a spike in consumer price inflation that raised doubts about chances of an interest rate cut at a central bank meeting next week to spur the flagging economy.

Annual consumer price inflation -- one of a clutch of price indicators watched by the bank -- jumped to 10.91 percent in February, up a fifth of a percentage point from a month earlier.

"That inflation number is very worrying for bank policymakers who are still concerned about inflation risks," Yes Bank chief economist Shubhada Rao told AFP.

She stuck by her forecast of a quarter-point rate cut but added the decision would be a "very close call" -- though analysts said they expected general economic weakness to override the bank's price concerns.

"Economic activity has remained weak much longer than official expectations, which will trigger additional rate cuts," said Jyoti Narasimhan, economist at IHS Global Insight.

Tuesday's industrial output figures included a 2.7-percent jump in manufacturing, which accounts for three-quarters of the Index of Industrial Production. Production of consumer goods rose 2.8 percent.

The big question, economists said, was whether the rise in industrial production would be sustainable and the answer was a cautious yes.

While data showed Monday that car sales in India's once-booming passenger market plunged nearly 26 percent in February -- the biggest dive in 12 years -- analysts said overall domestic demand should start to improve.

They expected interest rate cuts and improved consumer confidence from a blitz of government financial reforms to starting feeding through to the economy.

Analysts also pointed to a rise in exports for a second straight month in February, helped by stronger global demand, and government assertions that the decline in overseas sales has been arrested.

India's weakening rupee should allow the country to grab greater export market share and boost industrial production further, they added.

Credit Suisse economist Robert Prior-Wandesforde said he expected industrial output to average 5.8 percent growth in the next financial year, up from around 1.5 percent this year.

"Manufacturing may have begun to turn around early in 2013, in line with the rest of the economy," said Glenn Levine, senior economist at Moody's Analytics.

"We still think the December quarter was the bottom of the economic cycle."