The Hindu Business Line : Manufacturing growth

In an endorsement of the surge in stock prices and the Sensex peaking past the 12,500 mark, manufacturing activity in India seems to have crested its own record going by the data for August. At 9.7 per cent the sector has been surging on the back of a strong spurt in consumer and capital goods sectors, two percentage points higher than in the corresponding period last year. Mining, power generation and basic goods may have' posted a decline in growth rates, but this has been more than compensated by manufacturing activity, spelling out the possibility of another good annual run in GDP growth of around 8 per cent, should the trend continue. As a result the economy is soaring but its future trajectory will depend on the way key issues are handled.

The current run of good fortune is both fortuitous and policy-driven. Successive good monsoons have kept consumer prices in general from getting out of hand though foodgrains are becoming dearer by the day. This portends a crisis, which policymakers are yet to get serious about. Part of the complacency arises from the undeniable fact that the peaking growth rates in the non-farm sector have been the result of policies of the past six years — a combination of easy interest rates and liberalising fiscal measures that have led to overall cost reductions. The pick-up in demand has done the rest, as is evident in the rapid growth of consumer spending and capital goods. The problem is that the full but lagged effects of those reforms may have been realised and the time is ripe for another round of reforms in sectors hitherto neglected.

So far, the RBI has been a most active policymaker, effecting two quarter-percentage-point increases in repo rates this year in the belief that they would dampen demand. With time they will, but for the wrong reasons. Rising interest rates in an unequally developed economy will not have the same effect as in a developed economy, of curbing inflationary pressures. On the contrary they will impact the expansion of the growth impulse thereby affecting demand precisely where it needs to pick up — at the margin, and in rural India. At the same time, the Centre has to act with alacrity shifting its concern from committee rooms to the ground, to the systemic crisis in farming that is an unviable option for an increasing number. Given the lagged effects of policy, the sooner it happens the better.

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