India's industrial output unexpectedly dropped by 0.6 percent in December from a year ago, due to a sharp decline in manufacturing activity, the official data released Thursday showed.  A Reuter’s poll of analysts had predicted 1.1 percent growth rate in December after a fall of 0.8 percent in November.

Another report released by the government showed that India's annual consumer price inflation accelerated to 10.79 percent in January from the previous month.

The unexpected fall in industrial activity has raised fears - contrary to the government’s views - that the Asia’s third largest economy has not bottomed out yet.

The Index of Industrial Production (IIP) contracted in November due to poor performance by the manufacturing and mining sectors and a fall in capital goods production.

The cumulative growth in IIP in the April-December period of 2012-2013 in comparison to the same period the previous year stands at 0.7 percent.

The manufacturing sector that contributes to 76 percent of the industrial production fell by 0.7 percent compared to the same month last year, according to the data released by the Central Statistics Office of the Ministry of Statistics and Program Implementation.  

The mining output in November declined by 4 percent compared to the corresponding period in 2011. 

Capital goods production shrank by 0.9 percent annually in December and consumer goods output growth declined by 4.2 percent over the corresponding period, a year ago.

"What is clear is that any meaningful industrial recovery is eluding us. Demand destruction is far more well entrenched than we thought," Sujan Hajra, chief economist at brokerage firm Anand Rathi told Reuters.

Fall in the IIP data has cast a gloom in the industry and is expected to put pressure on India's Finance Minister P.Chidambaram to present a growth-oriented budget Feb.28 for 2013-14 fiscal year.

Earlier, Chidambaram had said that the economy has bottomed out and is on the path of recovery. Rebuffing the Central Statistical Organization's projection that the GDP growth will be at 5 percent this year, minister had claimed that the projection was based on “dated data."   

"Why should we, without any reason, denigrate our own performance and record? I have no doubt in my mind that we will come out of the trough and we will climb back to a growth rate of between 6-7 percent next year," he said, according to Reuters.

However, economists believe that the IIP data is in line with the statistical organization's projection of 5 percent growth. They point out that the government’s recent reform measures and the Reserve Bank of India's (RBI) rate cuts last month will yield long term benefits.

"Today's reading is supportive of the CSO estimate of 5 percent GDP growth for FY13. Addressing risks to growth will be the main priority for the RBI and the government in the coming months," Rupa Rege Nitsure, Chief Economist, Bank Of Baroda told Reuters.

"It is now an understood fact that the government's reform announcements are long-term positive. In the near term, the government needs to hurry up with project clearances to get industry back on track. However, I still think that 5.4 percent GDP growth for FY13 is feasible unless things worsen in the March quarter,” Anjali Verma, Economist, Phillipcapital said.

January Consumer Price Inflation Rises To 10.79%

India's annual consumer price inflation accelerated to 10.79 percent in January, higher than the 10.56 percent recorded in the previous month, government data showed Tuesday.

As per data, the corresponding inflation rate for rural areas was 10.88 percent, while that of urban areas was 10.73 percent. The overall data combined both urban and rural numbers. Higher inflation was attributed to the increase in prices of food items such as fruits and vegetables, meat and poultry products, clothing, oil and fuel.

Analysts believe that the hike in the retail inflation is likely to hold back RBI from further rate cuts in its next quarterly monetary review. In January, RBI had cut policy rates by 25 basis points for the first time in nine months to boost growth as inflation showed signs of moderation.