By Rajesh Kumar Singh and Manoj Kumar
NEW DELHI (Reuters) - India's economic gloom deepened on Friday with a surprise contraction in industrial output, a fall in exports and a jump in the trade deficit, underscoring the enormity of challenges awaiting a new government that takes over in May.
Economic growth in Asia's third largest economy has almost halved to below 5 percent in the past two years on weak investments and consumer demand, in the worst slowdown for the south Asian nation since the 1980s.
Friday's government data, which measures production at mines, utilities and factories, provided no relief.
A continuing slump in capital and consumer goods sectors resulted in a surprise 1.9 percent annual contraction in industrial production in February, which compares with analysts' median forecast of 0.9 percent growth.
Manufacturing fell 3.7 percent year-on-year in February. Industrial output has fallen in four of the last five months.
Also Read
"Both consumer demand and investment conditions seem to be weakening, thereby further dampening the outlook for manufacturing," said Arbind Prasad, director general of FICCI.
"Revival of manufacturing growth requires some bold reforms in the area of the business regulatory environment which should be the focus and priority for the (new) government," he added.
In other data on Friday, merchandise exports fell for a second straight month in March, widening the trade deficit to a five-month high.
The trade gap in March widened to $10.51 billion, its highest since October 2013, data from the Ministry of Commerce and Industry showed on Friday. Overseas sales of Indian goods fell 3.15 percent from a year earlier to $29.58 billion in March.
Merchandise exports for the 2013/14 fiscal year, however, grew 3.98 percent on year to $312.36 billion. Together with an 8.11 percent decline in annual imports, that helped sharply narrow the country's full-year trade shortfall to $138.59 billion from $190.34 billion a year ago.
ELECTION PROMISE
The ruling Congress party's failure to revive the economy has turned the opposition Bharatiya Janata Party's pro-business leader Narendra Modi into the overwhelming favourite to head a new government after national elections which began this week.
Thanks to his success in expediting investment projects in Gujarat, Indians hope the BJP leader will be able to reverse the slowdown in jobs and investment growth in a country with a rapidly growing young workforce.
Ratings agency Fitch, which affirmed India's sovereign credit ratings at 'BBB-' with a stable outlook on Friday, reckons its economic fortunes will remain uncertain until the elections are over.
"A policy push that includes structural and governance reforms, fiscal consolidation and efforts to rein in inflationary pressures would likely require a coherent coalition with a strong electoral mandate," it said in a note.
Investment malaise lies at the heart of India's prolonged economic slowdown. Capital investment contributes nearly 35 percent to the economy, but it barely grew in the fiscal year that ended in March as delays in clearances and funding issues grounded many infrastructure projects.
Although a cabinet task force set up by Prime Minister Manmohan Singh has fast-tracked approvals for projects worth 6 percent of gross domestic product, results are not yet visible.
Capital goods output, a proxy for capital investment, shrank for a third straight month in February, falling by an annual 17.4 percent.
India's wobbly economy has made it vulnerable to any shift in capital flows.
Among the "Fragile Five" emerging economies, India suffered from massive capital outflows last year, in part due to concerns over a bloated current account deficit, after the U.S. Federal Reserve signalled a winding back of its monetary stimulus.
Heavy outflows sent the rupee to a record low last August, prompting Indian authorities to build up foreign currency reserves and clamp down on gold imports.
(Editing by Gareth Jones)