The Hindu Business Line : Erratic picture

As if mirroring the stock market, industrial growth over the past five months of the current fiscal has sketched a wobbly course. The latest data for September show a growth rate of 6.4 per cent over September 2006, the slowest monthly growth since October 2006, and almost similar to the July 2007 growth of 7.1 per cent. While August had witnessed the brisker pace of 10.7 per cent, the September figure pulled down the showing in the first six months of the financial ye ar to 9.2 per cent from 11.1 per cent in the corresponding period of the previous year. Given the erratic growth in August and September, it is unclear how the next two quarters will pan out. Initial sentiments about festive season spends are not good enough to prompt one to believe that October-December will compensate for July and September’s poor showing.

Yet a look at sector growth and credit offtake may suggest possible outcomes that policymakers would do well to note before they flaunt a roseate future of a nine per cent growth. Consider consumer spending, arguably the most critical catalyst for the growth of the last four years. One could argue that with average inflation falling to around 3 per cent, consumer goods demand would have been riding high. With manufactured product inflation at 4 per cent in September; with virtually no growth in fuel inflation for that month, why did industrial growth fall to its lowest level since October 2006? Part of the answer lies in the August surge of 10.7 per cent itself. That pick-up was occasioned by strong capital demand and mining activity even as consumer demand fell just as it did in July. Beneath the roller-coaster ride of industrial growth over the July-September period, failing consumer demand runs like an occasionally glimpsed trip wire.

With high interest rates, bank credit growth has had its biggest impact on consumer spending. Non-food credit growth slowed to 5.3 per cent by October 2007 from 9.4 per cent a year ago; so did personal loans growth from 26.5 per cent to 19.8 per cent (March to August 2007), while that of credit to services fell from 31 per cent to 24.5 per cent recording a “sizeable slowdown”, notes the RBI in its Mid-Term Review. On the other hand, credit to infrastructure machinery and chemicals grew faster than last August, thus mitigating the decline in consumer industries.

In effect, the industrial sector is shifting its emphasis to capacity expansion and this is a welcome change for long-term growth. But any gains from that could be offset by a stubborn food inflation that persists above 7 per cent for the most vulnerable.

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