Beating the forecasts

India's industry continues to power along, undaunted by high energy costs and rising interest rates. The index of industrial production has beaten most forecasts, and shown growth of 9.6 per cent in June, compared to 10 per cent in May (revised to 11.1 per cent) and 9.5 per cent in April. The average for the first quarter of the financial year, therefore, is 10.1 per cent""which is healthy acceleration from the 8.8 per cent average achieved in 2005-06. The tempo is particularly impressive in capital goods (23.7 per cent growth) and consumer durables (19.9 per cent). On the strength of these flattering numbers, and the strong showing of construction, credit offtake, trade and transport, as well as other elements of the services sector, there is every reason to expect an announcement (due normally at the end of September) of more than 8 per cent GDP growth in the April-June quarter""thus maintaining the average of the past three years.

Indeed, it is now plausible that GDP growth in the full year will once again be nudging the 8 per cent level""more than what many forecasters have said so far. But that is possible only because the energy shock has so far been absorbed mostly by the government and by the oil companies (there will be a price to pay later). The other big policy challenge will be on the credit front. If the current frenetic pace of credit growth is sustained, the Reserve Bank will have to either rein in the horses or find ways of pumping in liquidity by December, at the latest. The danger in the latter course of action is unrestrained growth of money supply, which is already running at 19.5 per cent, the highest in more than a decade, and much faster than the RBI's preferred rate of 15 per cent.

Meanwhile, what is heartening about the picture so far is that the manufacturing sub-sector has been leading the pace, with 11.2 per cent growth in June. Mining and electricity continue to be laggards, and the question would be how long manufacturing can maintain a rate of growth that is twice as fast as the growth of electricity generation. If there are worries, therefore, they are in the performance of six sectors collectively labelled "core" by the country's statistical system""finished steel, cement, electricity, coal, crude petroleum and refined petroleum products""which showed aggregate growth in output of 6.3 per cent in June, the same as in the previous (January-March) quarter. This is slower than the 7.5 per cent in the corresponding quarter of last year. But over the last four years, a period that has seen consistently accelerating industrial growth, barring a few months with negative blips, the core sector index has shown greater volatility than the IIP. There have been a number of monthly releases in which the smaller index dropped sharply, only to be succeeded by relatively healthy IIP growth numbers. One worrying element today is the sharp rise in refined petroleum products, on many of which oil companies are making losses on every additional unit produced. This underscores the threat that these companies face because of the government's reluctance to raise domestic prices in line with global trends.