It's raining growth

The early blues about an inadequate monsoon have subsided. Virtually the entire country has had good rains so far and, assuming that the monsoon will not peter out in the next few days, the performance of the agricultural sector should conform to trend.

As if this reassurance were not enough, the industrial sector has come up with more positive news. The Index of Industrial Production (IIP) for May 2005 reveals that the sector as a whole grew by 10.8 per cent over May 2004, compared with 6.8 per cent last year.

The manufacturing sector, which accounts for about 80 per cent of industrial activity (the rest coming from mining and electricity), grew at an impressive 11.5 per cent, compared with 7.5 per cent last year.

Best of all, electricity generation grew by 10.6 per cent, compared with a disappointing 3.1 per cent last year. This provides some comfort against the perception that power shortages are going to cripple industrial activity sooner rather than later.

Among the manufacturing sectors leading this charge, textile products clocked a spectacular 35.1 per cent growth, reflecting buoyancy in export markets.

The end of the quota regime appears not to have been too much of a setback to Indian producers. The entire metals and engineering segment sustained the momentum seen over recent months.

Basic metals grew at almost 14 per cent, while machinery and equipment, an important indicator of investment activity in the economy, grew at close to 16 per cent.

Transportation equipment also sustained double-digit growth. Sectors not doing particularly well include wool, silk and man-made fibre textiles, wood and wood products and rubber and plastic products.

However, these together account for a relatively small proportion of total manufacturing output.

The ongoing industrial expansion is close to its third anniversary. This is significantly longer than other recent cyclical upturns and must raise questions about sustainability.

And, a number of risks are clearly visible. Stubbornly high oil prices are perhaps the most important. Manufacturing, in particular, is sensitive to energy prices.

Interest rates are firming up abroad and at home. The financing-led demand boom in many sectors will be affected by this.

A major concern is the reported stagnation in the highway development programme, which has been an important contributor to demand for industrial products over the past three years.

None of these is insurmountable, however. The government cannot do very much about oil prices, but it can encourage and facilitate energy conservation.

Interest rate movements are typically cyclical and Indian interest rates are moving in a relatively narrow band. The negative impact of increasing rates may well be swamped by the sheer number of new borrowers.

The highway programme and other infrastructure investments are in the government's hands, either in terms of resource commitments or policy and regulatory reforms.

Even if industrial growth were to slow, it is unlikely in the current scenario to be a dramatic change. Fortunately, it seems to be able to keep chugging along for the time being, unmindful of confrontational politics and weak governance.