All-round growth

The June numbers for the Index of Industrial Production (IIP) show continuing buoyancy in the sector, particularly in manufacturing. This latter grew at a rate of 12.5 per cent over June 2004, taking it to an impressive 11.2 per cent growth during the first quarter of 2005-06.

Of the other two sub-sectors, electricity also showed significant acceleration, growing by 9.4 per cent in June, compared to less than 5 per cent last year, while mining grew by 5.8 per cent, almost twice last year's rate.

The overall index thus grew by 11.7 per cent in June, taking its growth for the April-June quarter to 10.3 per cent. With the decent performance of the monsoons (from an agricultural point of view, at least), 2005-06 has clearly started off with a bang as far as economic growth is concerned.

Of the 17 industrial groups in the manufacturing sector, 16 showed positive growth rates in June, with seven of these registering double digits growth. Leading the pack were textile products, with a growth rate of almost 38 per cent, exceeding the previous month's record of 35 per cent. Taken in conjunction with figures on exports, this growth apparently reflects the quick response of the Indian apparels sector to the end of the quota regime at the beginning of 2005.

The other sector which has shown relatively high growth during the last few months is chemicals, which grew by over 20 per cent in June. Metals and transportation equipment continue to do well, staying in the 10-15 per cent range.

A slight cause for concern is the fall in the growth rate of the machinery and equipment sector to below 10 per cent for the first time in several months. This is below its growth rate of almost 12 per cent for the April-June quarter.

The first signs of the current expansion were seen in July 2002. So, it has been in progress for 36 months, barring a couple when the growth rate dropped below 6 per cent.

It is already the longest period of expansion after the reforms of 1991; more importantly, it has not been accompanied by sharp increases in the prices of manufactured goods like those that were seen in the mid-1990s.

The non-inflationary nature of the expansion has allowed the Reserve Bank of India to maintain a generally benign interest rate scenario, which has contributed significantly to the persistence of the expansion.

And, it has shown an element of self-sustainability by virtue of the fact that emerging capacity constraints have fuelled new investment activity. In the immediate future, certainly, there are very few signs of the momentum flagging.

However, it would be wise not to lose sight of some rather obvious threats. The most significant, of course, is oil prices, which have confounded virtually everybody.

At current price levels, the ability of the global economy to resist the impact, as it has done so far, must be questioned. In the domestic context, it must be remembered that investment activity, which has been a major growth driver in recent months, is inherently cyclical.

Sooner or later, potential investors decide that it isn't worth installing new capacity just yet. And, then there is the enduring problem of infrastructure; the faster the economy grows today, the sooner it will run headlong into the constraints imposed by unresolved policy issues.