The country's manufacturing output contracted by more than a fifth in March from a year earlier, fanning hopes that the central bank will ease rates further to kick-start the economy amid the coronavirus outbreak.
The 20.6 per cent fall in manufacturing was driven by the closure of thousands of factories after the government imposed a national lockdown in the last week of March.
Industrial output, which includes manufacturing and mining, contracted 16.7 per cent in March from a year earlier, compared to analysts' forecast of an 8.7 per cent fall in a Reuters poll, data released by the Statistics Ministry on Tuesday showed.
Economists said manufacturing was expected to face a severe slowdown for the next few quarters even as government plans an economic package for the industry after lifting some restrictions.
Private economists and rating agencies say India's economy could contract by up to 0.5 per cent in the current financial year beginning April, compared with earlier government estimates of around 6 per cent growth.
This is likely to encourage the Reserve Bank of India (RBI) to ease rates and pump in more liquidity.
"The RBI's focus has shifted to growth considerations as India is headed for the worst possible recession," said Rupa Rege Nitsure, chief economist at L&T Financial Holdings in Mumbai.
Industrial output for fiscal 2019/20 ending in March contracted 0.7 per cent from the year earlier, the data showed.
In April, the unemployment rate rose to 23.5 per cent from 8.7 per cent the previous month, data released by the Centre for Monitoring Indian Economy, a Mumbai-based think tank, showed.
Separately, the government put the release of retail inflation data on hold due to inadequate collection of information from the field during the lockdown.
Government is starting to pull back from one of the world's tightest lockdowns of 13 crore people that has left millions out of work and stranded in cities far from home while infections keep rising.
India's coronavirus infections have crossed 70,000, including 2,293 deaths.