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A man works at an iron scrap yard at an industrial area in the southern Indian city of Chennai on August 9, 2012. India's industrial output fell for the third time in four months in June, adding to pressure on new Finance Minister P. Chidambaram to move quickly and pull Asia's third-largest economy from its worst slowdown in almost a decade.BABU/Reuters

India's industrial output shrank by a shock 1.8 per cent in June, data showed Thursday, highlighting the challenge for new finance minister P. Chidambaram to reverse the nation's sharp growth slowdown.

Manufacturing output, which accounts for three-quarters of the Index of Industrial Production, was chiefly to blame, falling 3.2 per cent from a year earlier in June, according to government figures.

Mr. Chidambaram called the numbers "disappointing" and said he would act in "double-quick time" to remove bureaucratic and other bottlenecks hindering India's production.

"We intend to find practical solutions," he said.

The industrial output fall defied market forecasts of close to 1 per cent growth and came as the country faces the spectre of its third drought in a decade, which would further reduce economic expansion.

"This was another shocking industrial production release from India... and will inevitably heap more pressure on the central bank to restart its rate cutting," said Credit Suisse economist Robert Prior-Wandesforde.

India's once-booming economy grew just 5.3 per cent between January and March – its slowest annual quarterly expansion in nearly a decade.

Unlike other central banks which have been cutting rates to spur growth, the Reserve Bank of India (RBI) has been holding back on reducing borrowing costs, saying it wants inflation running at more than 7 per cent to ease first.

"The situation calls for urgent policy measures both by the RBI as well as the government to salvage industry from further decline," said Chandrajit Banerjee, director general of the Confederation of Indian Industry.

The next quarterly growth figures are due at the end of the month but "the omens are not particularly encouraging", Mr. Prior-Wandesforde said.

Capital goods output, a vital investment signal, slid 27.9 per cent in June – the largest contraction on record according to Credit Suisse.

Manufacturing in Asia's third-largest economy has been undermined by high interest rates to combat inflation and Europe's debt crisis, which has hit exports.

Mr. Chidambaram, named finance minister last week, has pledged to restart India's "growth engine" and has already indicated he wants lower rates, saying "sometimes it is necessary to take carefully calibrated risks".

But analysts are sceptical about how much he can achieve with the left-leaning Congress government under pressure after a string of graft scandals, and parliament gridlocked over attempts to liberalize the inward-looking economy.

Economists have already been taking a knife to their growth projections for the fiscal year to March 2013 with Goldman Sachs economist Tushar Poddar expecting 5.7 per cent in contrast to the central bank's forecast of 6.5 percent.

Glenn Levine, senior economist at Moody's Analytics, said on Thursday he believed growth would be closer to 5.5 per cent.

Citibank has said if a nationwide drought is declared -- which would be the country's third in a decade -- expansion could be as low as 4.9 per cent.

Farming's contribution to gross domestic product has fallen from 50 per cent in the 1950s to some 15 per cent, but remains key by supporting 700 million rural Indians and fuelling demand for everything from TVs to motorcycles and gold.

Already around a dozen of India's 29 states have declared themselves "drought-affected".

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