The Hindu Business Line : Manufacturing growth

Amid the spreading gloom about spiralling inflation and the seeming inability of the Government to control it comes a happy news. The latest data on industrial production, for January 2007, released by the Central Statistical Organisation (CSO), confirm yet again the stellar role that industry has been playing in keeping the robustness of GDP growth through the last three quarters. Thus, manufacturing registered 10.5 per cent growth in January compared with 8.5 per cent for the same month last year. Mining pitched in with a three-fold improvement, at 6 per cent, taking the cumulative industrial production performance to 11 per cent in April 2006-January 2007 compared with 8 per cent in the corresponding previous period. The good news, however, ends at this point because the CSO records rather gloomy data for the capital goods sector over the same period.

All through the nine months up to January 2007, the capital goods sector witnessed unhealthy fluctuations though the trend was towards a decline. In January this year, the sector's growth was a niggardly 8 per cent after a robust 27 per cent increase the corresponding previous period. In large part the shifting fortunes of the sector lie in the surge of capital goods imports propelled by strong domestic demand on sustained economic activity. During April-September 2006, capital goods imports grew at around 39 per cent riding on the back of a 53 per cent jump in the corresponding previous period. Predictably, the consumer goods sector did fairly well with a nine per cent growth in January this year although it was lower than the growth the previous two months, and consumer durables recorded a lower growth of 6.8 per cent compared to a high of 15 per cent last January. These data on consumer goods may perhaps provide some indication of what to expect in the coming months as both inflation and the tightening of interest rates squeeze demand at the margins.

Although the current fiscal may end with the Index of Industrial Production at around 11 per cent, policymakers should not be too sanguine that the party will last indefinitely with inflation still unchecked. Unrequited demand will only tempt the Reserve Bank of India to harden interest rates even more in a bid to squeeze liquidity out of the system. Clearly this would be counterproductive, especially for the poor unless it is backed by radical reforms to overhaul the laggard sectors and get them moving. So far, policymakers seem more concerned about funds and budgetary allocations than clearing the thicket of regulations and ambiguities that make both infrastructure and agriculture bad investment choices.