Cold December seems to have been heated up by the sharp rise in the index of industrial production (IIP). The IIP grew at an annual rate of 16.8 per cent during December, which is higher than the previous business cycle peak recorded four years ago. Indeed, this monthly rate is the highest in 15 years, and is partly because of the extremely low base of 12 months ago. The manufacturing sector, which makes up 80 per cent of the IIP grew at a China-type rate of 18.5 per cent. Even if you discount the low-base effect, the trend since April is unmistakable and upward. The IIP growth rate has climbed steadily for several months, and the cumulative growth rate is 9 per cent. Industrial growth might be four times higher this year as compared to last fiscal. This growth is spreading to all sub-sectors, with especially strong in consumer durables (46 per cent) and capital goods (39 per cent). The former was anticipated due to the exceptionally strong showing of the auto sector. The latter bodes well, since good health of the capital goods sector suggests that corporate expansions are on track. Leading indicators such as non-oil imports and credit off-take from banks, along with order book for capital goods, all point to a business cycle on an upswing. This phase, if properly managed, can last for multiple years, as is the norm for investment cycles.
At this stage, the government is trying to manage an economic recovery alongside managing an exit from the fiscal and monetary stimulus. In fact, it all boils down to the management of expectations and keeping the investment optimism on an even keel. Hence an abrupt exit from the stimulus runs the risk of hurting both consumer and business outlook. At the same time, a lower fiscal deficit sends a positive signal, since it implies lesser pressure on interest rates and perhaps inflation. Hence, an exit has both pluses (lower deficit) and minuses (diluting spending impulses). Given that by next year we will transit to Goods and Services Tax, of about 13 to 14 per cent, it may be best to calibrate taxes to head that way. A gradual exit of fiscal stimulus can be achieved by increasing excise and service taxes by 2 percentage points, as reported likely in this newspaper, in the 2010 Budget, and the remaining instalment next year. The exchequer can also count on strong receipts from the disinvestment process in the coming months if the process is better managed. A successful divestment does not, however, mean only maximising revenues. The stock markets are known to be fickle, and one can never time the market right. Hence, peak pricing is not possible, nor may it be desirable. Some deliberate under-pricing can set up a bull run like the one started by the initial Maruti sale. Given the fiscal bind he finds himself in, the Union finance minister must rejoice at the bells that the IIP has set ringing. But this sweet music should not prompt the FM to go in for an over kill in revenue-raising. A judicious cutting of wasteful expenditure is a good thing to do, while swinging the excise baton gently.
