Powering along

All those who feared that the economy would slow down this quarter because of higher energy costs and rising interest rates, must stand re-assured by the double-digit growth in industrial production in May, the 25 per cent export growth in June, and the encouraging nature of the early-bird corporate results for the April-June quarter. In other words, the impact of both rising interest rates and higher oil prices has been minimal so far, as each predicted tipping point appears to get pushed back further with increased productivity, globally as well as locally.

The export and industrial booms are testimony to this, and are linked. Between 1997-98 and 2000-01, manufacturing in India grew at the rate of 5.3 per cent while exports of manufactures rose 6.6 per cent annually; between 2001-02 and 2005-06, in contrast, manufacturing accelerated to 7.9 per cent, fuelled to some degree by a trebling of annual manufactured exports growth to 20 per cent. To a large extent, this was the product of an unprecedented boom in the global economy (world exports have risen 5 per cent, 17 per cent and 21 per cent, respectively, over the last three years), but important local factors cannot be overlooked. Indian manufacturing became more competitive, and exports more diversified in terms of both products as well as destinations. Engineering goods comprised 14 per cent of the 1999-2000 export basket, and rose to 21 per cent in 2005-06. Exports of both textiles and readymade garments have shot up, but their share in the basket has fallen from 27 per cent to 16 per cent, suggesting elbow room for more growth. Petroleum products did not figure in the export basket at the turn of the century but today account for over 11 per cent of the mix. And as for markets, exports to the world's fastest-growing region, China, are up from 1.5 per cent of the total in 1999-2000 to 6.5 per cent today. Apart from the export-led boom, a 6.5 per cent annual increase in per capita GDP over the last three years has had its own impact on industrial growth""the rapid rise in consumer spending, for instance, ensured that the index of consumer goods rose by 12 per cent for the second year in a row, while for durables the growth in the index has been 15 per cent.

It is from this perspective that one must view the expected hike in interest rates by the Reserve Bank next week. Consumer lending has already slowed down in the last quarter, and this might begin to affect demand for housing and cars, though there is the possibility that lenders will play with loan tenure to keep monthly loan repayments in check""the US experience with rising interest rates that had no evident impact on growth suggests the causality is weaker than generally assumed. Companies are also sitting on piles of cash (Rs 150,000 crore is one estimate), so the impact of an interest rate hike on growth may be less than imagined. The joker in the pack, then, is likely to be a real oil shock, though a Standard & Poor's report suggests that oil prices would have to rise to $100 before they have any serious impact on the global economy. That looks more likely today than a month ago, given events in West Asia, and would therefore underscore the jitters that have overtaken markets worldwide in the last few days.