Ending on a high note

The Index of Industrial Production numbers for March were released on Friday, putting the last pieces relating to the sector's performance during 2006-07 into place. Broadly, they confirm what has been increasingly evident for several months now: that this was a phenomenal year for the manufacturing sector. It grew by 12.3 per cent over the year. Somewhat more modest performances by the mining and electricity sectors, which are also covered by the index, led to an overall growth rate of 11.3 per cent, still impressive. These numbers make it virtually certain that GDP growth for the year will exceed 9 per cent. Further, to the extent that the performance over the most recent months is an indication of either loss or gain of momentum, since the rather surprising blip in October 2006, there have really been no signs of slackening, at least at the aggregate level.

The persistence of momentum is largely corroborated by corporate results that have been coming in over the last few weeks. As today's front page report points out, while there are significant differences across sectors, aggregate profitability during the fourth quarter of 2006-07 is the highest recorded over the past eight quarters. Operating profit margin for the sample of over 1,000 companies was almost 20 per cent, nearly 2 percentage points higher than in the previous quarter. Profits grew by about 45 per cent over the corresponding quarter of last year; if the commodity companies are excluded from the sample, the growth rate rises to 60 per cent.

All of this points to a great ending to a great year for the manufacturing sector and the economy as a whole. But, that is in the past and its only significance now lies in what it portends for the year ahead. The industrial production numbers for February indicated a rather sharp decline in the growth rate of consumer durables, something that was linked to rising interest rates. That pattern continued in March, with the category growing by a meagre 2.7 per cent over March 2006. Among the other use-based classifications within the index, however, there isn't comparable evidence of loss of momentum. All the four have clocked growth rates well into the double digits, with a couple even showing signs of recent acceleration. Capital goods, the other category that might have been expected to show a response to interest rates, particularly as it includes commercial vehicles, grew by over 13 per cent during March, slightly less than its growth for the whole year of 17 per cent, but still indicative of robustness.

Moving from an aggregate to a sectoral perspective, there are some signs of a change in direction. Commodity sectors have generally shown some slackening in profitability as global prices have moderated and domestic costs, including interest rates, continue to harden. Beyond this, some manufacturing sectors such as transportation equipment did grow in recent months at rates below their annual rates. Food and beverages and leather goods, for example, had a rather disappointing finish to the year. Transportation equipment also shows this pattern, but very mildly so. Overall, in the context of the virtually unanimous view that GDP growth in the current year will be slower than in the previous one, we are clearly going to have to wait for a while for corroborating evidence.