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India’s factory output shrank in November after registering two straight months of growth, signalling that the nascent recovery in Asia’s third-largest economy is yet to take deep roots.

This is likely to add pressure on finance minister Nirmala Sitharaman to announce more measures to support growth in the economy in her third Budget that is scheduled to be presented on 1 February.

However, in a relief to the government and the central bank, retail inflation sharply slowed to a 14-month low in December, returning to the comfort zone of the Reserve Bank of India as food inflation subsided.

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Data released by the National Statistical Office on Tuesday showed the Index of Industrial Production (IIP) declined by 1.9% in November as manufacturing (-1.7%) and mining (-7.3%) contracted. Electricity output, however, grew by 3.5%. Support from a low base available till October vanished beginning November, which could adversely impact factory output growth for the rest of the fiscal to March. Separately, retail inflation decelerated to 4.59% in December from 6.93% a month ago, as vegetable prices fell 10.4% from a year ago with prices of onion easing substantially.

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Sunil Kumar Sinha, principal economist at India Ratings, said the November IIP data once again shows the uptick seen in September and October due to a combination of festive and pent-up demand and the economic recovery is still shallow and fragile. “In view of growth concerns, we expect the RBI to continue its accommodative policy stance and maintain status quo on policy rate in the forthcoming monetary policy review while keeping a close eye on the upcoming Union budget to ascertain the government’s fiscal stance," he added.

Among use-based industries, capital goods—considered an indicator for investment demand in the —fell back into contraction zone (-7.1%) in November, after registering growth in October for the first time in 22 months. Both consumer durables and consumer non-durables also contracted in November, signalling weakening demand. The economy is officially projected to contract by a record 7.7% in FY21 for the first time in 41 years, with NSO assuming 0.6% growth in the second half (October-March) of FY21.

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