Good growth pattern

The latest figures of the Index of Industrial Production are evidence that industry too is turning buoyant. The provisional estimates for the 11 months of 2003-04 (April-February) has increased to 6.7 per cent from 5.8 during the corresponding period of the previous year.

The manufacturing sector has done even better by recording 7.2 per cent as against 6.0 per cent. The 7 per cent plus growth in the industrial sector in February 2004 over the same period last year may not be the best that industry has achieved "" industrial growth in 1995-96 touched 13 per cent "" but it is significant because of its structure and spread. The 7.4 per cent growth in industry is based on a 12 per cent increase in electricity, 6.7 per cent in manufacturing and 9.6 per cent in mining.

The spread of growth across the sectors reduces the chances of supply side bottlenecks constraining future growth. More important is the fact that the 7.2 per cent growth in manufacturing is fuelled by almost 25 per cent growth in capital goods which have picked up sharply from 5 per cent in February last year.

This is perhaps the first time in many months that the capital goods sector has outperformed not only the consumer segment but the basic and intermediate goods sectors as well. The basic and intermediate goods also show noticeable improvement in growth rates.

The pattern of industrial growth implied in the IIP numbers augurs well for future growth. What started off as an industrial revival based on consumer durable and non-durable growth has now spread to basic and intermediate and capital goods.

Indeed that is how a classical demand led revival takes place: first the demand growth impulse is felt by those sectors that are closest to the consumer. These are the consumer non-durable and durable segments. Then the impulse is transmitted to those sectors that are the farthest removed from consumers, finally reaching the capital goods segment.

However, a caveat needs to be added. In IIP there is a degree of overlap between the capital and consumer non-durable categories. Automobiles are included in the capital goods category. So are electronic goods of certain kinds that would be more appropriately classified as consumer durables.

This overflow of consumer durables into the capital goods category makes it difficult to assess the degree to which the recovery in capital goods is driven by consumer durables. But the lagged response of the core sectors to the growth impulse could be indicating that the existing excess capacities that had been created in the period 1993-96, just after liberalisation began, have now been utilised and that new capacities are now being created.

The first phase of the current industrial recovery seems to have been in utilising the existing excess capacities and the next phase will be devoted to increasing these capacities. The spheres and sectors in which this expansion takes place will determine if manufacturing sector can fuel a sustainable revival in the commodity producing sectors.