The momentum returns ...

When the Index of Industrial Production (IIP) for October 2006 was released last month, the numbers came as a shock to many people. The year-on-year growth rate was far below expectations, provoking speculation about whether the business momentum of the past three years was petering out. In the absence of any other evidence to that effect, the reasonable view was that it was just a monthly aberration. In the event, the November numbers, released last Friday, have provided a surprise on the upside. Compared with expectations that were in the range of 11-11.5 per cent growth over November 2005, the IIP has clocked in with overall growth of a flattering 14.4 per cent. The manufacturing sector, accounting for almost 80 per cent of the index, was primarily responsible for this, having grown by 15.7 per cent over the previous November.

But just as the October numbers were not a signal of a slowdown, the November surge is attributable to a base effect. The growth rates of the manufacturing component and the overall IIP in November 2005 were 7 per cent and 6 per cent, respectively--significantly below the benchmark for 2005-06 as a whole. However, even after accounting for this, the industrial sector has grown during April-November 2006-07 by 10.6 per cent in comparison with the corresponding period of last year, and significantly better than the 8.3 per cent growth rate in the same period of 2005-06. The manufacturing sector has achieved 11.5 per cent, compared with an already impressive 9.4 per cent last year. If anything, this suggests that industrial momentum is actually increasing.

With reference to the use-based segments within manufacturing, the two that have contributed most significantly to the November surge are capital goods, which grew by over 25 per cent, and intermediate goods (over 16 per cent). The other three""basic goods, consumer durables and consumer non-durables""also grew at healthy rates, but below the growth in the overall index. For the April-November period, however, capital and consumer goods have shouldered the responsibility, achieving 16 per cent and 12 per cent, respectively. Drilling a little deeper and looking at specific industries, basic metals, transport equipment and machinery and equipment have done relatively well during the year, while food products, some of the textile segments, wood and furniture and leather have lagged behind.

A number of macro-economic implications emerge from the April-November patterns. First, it would seem that the restrictive monetary policy stance during this period has had little impact on investment behaviour, as revealed by the momentum in capital goods. Although the investment boom has been in evidence for over three years now, the sustained performance of the machinery and equipment industry suggests that it is still some distance away from a downturn. Second, even though consumer goods have shown good growth, if there are any signs of softening, they are in this segment. Consumer durables grew at a somewhat lower rate than during last year. Non-durables also show some easing of the momentum, reflecting both domestic and international market conditions. From a domestic perspective, this suggests that rising interest rates may be affecting consumption more than investment. Sustained investment activity in the face of a possible slowdown in consumption expenditure growth points to a moderation of growth in the short term, but high levels optimism about the future.