The figures suggested India's economy, hit by a dozen interest rate hikes in 18 months and a gloomy global outlook, may be losing traction faster than anticipated due to aggressive monetary tightening.
The 4.1 percent August rise in output from India's factories, mines and utilities was lower than the 4.5 percent growth in the same month last year and undershot financial market expectations of five percent expansion.
"The August figure was very weak," said Glenn Levine, senior economist at Moody's Analytics. "This underscores the downside risks facing the Indian economy. India's second-half slowdown may be steeper than anticipated."
Finance Minister Pranab Mukherjee called the data "disappointing". August's industrial output performance, however, was marginally better than July's revised 3.8 percent rise.
Central bankers worldwide have been reducing lending costs to boost their economies and to shelter them from global financial turmoil.
But the Reserve Bank of India, which has already raised rates 12 times since March 2010 -- the fastest pace of increases in the institution's 75-year history -- is under pressure to lift rates further.
Inflation is still stubbornly high at 9.78 percent, the highest among major global economies, and India's currency has fallen by around 10 percent in 2011, exacerbating price rises by making imports such as fuel costlier.
Many analysts say the bank could hike rates again at a meeting October 25 as it tries to curb price rises in a country where the World Bank says three-quarters of the 1.2 billion population survive on less than $2 a day.
Inflation has created a huge headache for the Congress-led government which relies on voter support from India's poor masses and is also reeling from a spate of corruption scandals.
Manufacturing grew 4.5 percent in August, down from 4.7 percent in the same month last year, as the high cost of credit forced many companies to defer expansion plans.
Output of consumer durables such as refrigerators and stoves expanded by 4.6 percent, sharply below 8.1 percent growth a year ago, reflecting weakening domestic demand as financing costs rise.
The data coincided with the release of a quarterly Dun & Bradstreet's survey that showed business optimism was down 12.1 percent from a year earlier and trade figures showed export growth was slowing.
India's exports grew by 36.3 percent to $24.8 billion in September, but Commerce Secretary Rahul Khullar said "the heady numbers have gone, it is clear there is deceleration" as the global economy softens.
In August, exports grew by 44.2 percent while in July they rocketed by 82 percent.
India's economy grew by 8.5 percent in the last fiscal year to March 2011 and Premier Manmohan Singh said Tuesday that the country will "achieve a growth rate of close to eight percent this year".
That projection is still robust compared to anaemic Western growth, but down from an initial projection of nine percent.
Copyright AFP (Agence France-Presse), 2011