India's industrial output shrank by a surprise 1.8 percent in October and retail inflation accelerated to a nine-month high, data showed Thursday, dealing a double blow to recovery hopes for Asia's third-largest economy.
The year-on-year output fall, which exceeded market forecasts of a 1.1 percent decline, was the first contraction in four months and the second weakest number since year's the start.
Consumer price inflation, fuelled by rocketing food costs, jumped in November to a higher-than-expected 11.24 percent and stoked expectations of another interest rate hike at a monetary policy meeting December 18.
"After a run of more encouraging data, the figures on Indian industry and inflation should help bring expectations for the economy back down to earth," said Capital Markets chief Asia economist Mark Williams.
The figures were grim reading for the scandal-scarred Congress government, which has been hoping for an economic turnaround before elections due in May after being routed in recent state polls.
Reserve Bank of India governor Raghuram Rajan said the bank was "very uncomfortable" with the inflation level but added growth was also "weaker than we would like".
He said monetary policy makers would look at all the data -- including the widely watched Wholesale Price Index due Monday -- before deciding whether to hike rates at its next meeting.
Finance Minister P. Chidambaram said taming inflation was the government's top priority, adding it is "common knowledge the government of the day will pay a high price for inflation".
Manufacturing output, which accounts for over three-quarters of the Index of Industrial Production, shrank by two percent in October.
The numbers dismayed business, with Chandrajit Banerjee, director general of the Confederation of Indian Industry, saying they "cast a shadow on hopes the economy has bottomed out".
India's economy grew at a decade low of five percent last year -- a far cry from near-double digit expansion during India's boom times -- due in part to high rates to combat inflation that slowed borrowing and spending.
Chidambaram expects the economy to expand by five percent again this year, but various economists see growth in the four percent range.
Exports have picked up thanks to a depressed rupee, but economists say overseas sales can only help at the margins since growth in the nation of 1.2 billion people is still mainly domestically driven.
Despite calls by business for growth-reviving cheaper loans, the bank has raised its lending rate twice since September, taking it to 7.75 percent, to curb inflation.
Economists said another 25-basis point hike might come next week at the bank's meeting.
"Inflation is clearly clashing with growth and while weakening growth needs rate cuts to prop it up, high inflation doesn't permit rate reductions," Dharmakirti Joshi, chief economist at Indian credit rating agency Crisil, told AFP.
"The economy is stuck between a rock and hard place -- making it an extremely challenging time for monetary policymakers," Joshi said.
Inflation has created huge hardship for India's hundreds of millions of poor. Vegetable prices soared by 62 percent in November from a year earlier.
"Consumer price inflation of 11.24 percent is a difficult number for any monetary policymaker to ignore," Yes Bank chief economist Shubhada Rao told AFP.
"The problem is that any nascent recovery could be jeopardised if interest rates stay at a high level," Rao added.
C. Rangarajan, chairman of the Prime Minister's Economic Advisory Council, was more upbeat.
"Vegetable prices are coming down very sharply now" thanks to bountiful harvests, and industrial production should pick up, he said.
"Five percent growth is still possible," he said.