The country's industrial growth rate slowed down to a disappointing 5.6 per cent in August compared to 10.6 per cent in the same month last year, according to official figures released on Tuesday.
The growth rate of the manufacturing sector, which accounts for 80 per cent of industrial output, slid to 5.9 per cent from 10.6 per cent in August, 2009.
"The figure is a little disappointing. Let us see how it fares in annualised terms," finance minister Pranab Mukherjee said.
The capital goods output, which indicates the amount of investment taking place in the economy, contracted by 2.6 per cent in August compared to an expansion of 9.2 per cent in the same month last year. India Inc attributes the slowdown to Reserve Bank of India's (RBI) tight money policy, which has pushed up interest rates for corporates.
RBI should not raise policy rates any further as it could have a negative impact on consumer demand as well as corporate investment and thereby slowdown economic growth, industry body Confederation of Indian Industry (CII) said.
"Negative growth in key sectors like capital goods, apparels...is indeed a cause of concern and with the appreciation in the rupee and hardening of interest rates, the growth of the manufacturing sector may be significantly affected," Federation of Indian Chambers of Commerce and Industry (Ficci) secretary general Amit Mitra said.
Reacting to the sharp decline in industrial output growth, the Bombay Stock Exchange (BSE) benchmark Sensex shed 136.55 points, or 0.67 per cent, to close at 20,203.34 points on Tuesday.
RBI will review its monetary policy on November 2. It has raised interest rates five times this year to bring down inflation, following which the rate for its key short-term lending (repo) stands at six per cent and borrowing (reverse repo) at five per cent.
Economists are of the view that the central bank will have to draw a balance between the need to check prices, as inflation is still high at 8.5 per cent, and push up economic growth.
The figures show that the mining sector output decelerated to seven per cent from 11 per cent and electricity generation to one per cent from 10.6 per cent.
The only sector that showed a positive trend in August was consumer durables, which grew 26.5 per cent compared to 24.7 per cent in August last fiscal.
Consumer non- durables, mainly fast moving consumer goods (FMCG), recorded a negative growth of 1.2 per cent.
Of the 17 industry groups, as many as 14 have shown positive growth during the month of August. Meanwhile, the industrial expansion figure for July was revised upwards to 15.2 per cent from the earlier estimates of 13.8 per cent.
Industrial growth for the first five months of this fiscal stood at 10.6 per cent in comparison to 5.9 per cent growth in the same period a year ago.