The desirable 8 per cent

Bad news and good news go hand-in-hand on the macroeconomic front. Last Friday, the wholesale price index for the week ended August 28 showed an annual rate of inflation of 8.33 per cent.

On the same day, the index of industrial production for July showed an annual growth rate of 7.9 per cent. This takes industrial production growth for the first four months of the year to a healthy 7.8 per cent. It was in July 2002, that the index first cracked the 6 per cent barrier after a prolonged period of sluggishness. It has remained above that mark ever since then, barring the odd month or two.

Two consecutive years of 6 per cent plus growth, while certainly not spectacular, indicate a certain durability that should not make the process completely vulnerable to anything less than a massive upheaval.

It is particularly reassuring that, for the last several months, manufacturing has been leading the charge. This segment grew at 8 per cent during April""July 2004, over an already high base of 6.4 per cent during the same period in the previous year.

Looking back at the last two years, there have been concerns expressed periodically at the relatively narrow base of the manufacturing recovery.

Only a small number of sectors have been consistently contributing to growth over the entire period; the rest have been relatively volatile. But, even within these narrow confines, there has been a significant, and positive, shift in the pattern of contribution since last September.

Until then, the two dependables were metals (primarily steel) and transportation equipment""across the spectrum from two-wheelers to commercial vehicles.

Since then, machinery and equipment, which had been experiencing zero, or even negative, growth for several months, suddenly shot into the reckoning.

Over the last few months, as the earlier drivers have settled into steady patterns, it is this critical capital goods sector that has been assuming a larger role in keeping the overall growth rate around the 8 per cent mark.

The immediate implication of this pattern, now that it has been in place for almost a year, is that there is an investment upturn in progress.

Evidence from other sources suggests that lots of producers across a variety of sectors are in the process of expanding and streamlining capacities.

The phase of predominantly productivity-driven growth seems to be coming to an end, making way for a phase of investment-led growth. The former would have ended sooner or later; the latter not only boosts current demand for industrial products, but also sows the seeds for future growth.

To the extent that the pattern persisted in July, it also suggests that the change in government has not so far impacted investment decisions.

There are, however, some dissonances in the numbers. Electricity generation grew at over 14 per cent in July, over a decline of 1.4 per cent in July 2003. During April""July 2004, it grew at 7.9 per cent.

All the while, complaints about power supply have been getting louder and louder. For such numbers to be an accurate indicator of performance, they have to appear reasonably consistent with general impressions.