The index of industrial production (IIP) is still on a winning streak. The index for March 2010, released yesterday, grew by a robust 13.5 per cent over the previous year. While it was a tad lower than the 15 per cent that financial market economists had predicted, there is little reason to question the sustainability of the industrial recovery that set in about eight months ago. The March print takes the growth in the last quarter of 2009-10 to a solid 15.1 per cent and to a respectable 10.4 per cent for the financial year as a whole. With this rate of growth in industry, growth in aggregate GDP seems all set to clock 7.5 per cent for 2009-10. This is a shade higher than the advance estimate of 7.2 that still constitutes the government’s official estimate for the year.
In March, industrial growth was broad-based with most of the major components — basic goods, intermediates, capital goods and consumer durables — pulling their weight. The “outliers” were consumer non-durables on the one hand that grew by a paltry 3.3 per cent, and consumer durables and capital goods on the other that beat the average by a mile, growing at 27 and 32 per cent, respectively. The pattern in March captures the growth pattern for 2009-10 as a whole, with capital goods and consumer durables in the lead and consumer non-durables trailing the pack. There are some caveats though when it comes to assessing the prospects for the current financial year. For one, the annoying but ever-present “base effect” is likely to pull IIP growth down this year. Exceptionally high growth rates in the second half of 2009-10 are likely to pull down the rates in the corresponding period in 2010-11 even if sequentially (month to month) industrial growth retains its momentum. Thus, one has to be prepared for weaker growth numbers by the end of the year, possibly even in low single digits. Again, despite the undeniably robust data on capital goods, there are a good number of sceptics who claim that the economy is not yet seeing a full-blown investment recovery. The surge in capital goods, they claim, reflects both a pick-up in truck sales (trucks and buses are included in the capital goods basket as transport equipment) and increased production of machinery in response to pending orders from just a couple of infrastructure sectors, particularly power and telecom. Fresh order flow, particularly from private sector firms wishing to expand capacity, is still weak. In short, the pick-up in the capital goods does not necessarily mean an upswing in investment demand across the board. The implication is that despite the apparently strong industrial growth numbers, the central bank must tread with caution when it comes to raising its policy rates. Otherwise, the mix of global uncertainty and high interest rates could stunt a recovery still in infancy.