Industry picks up

Momentum suggests 9 per cent for the full year

The overall Index of Industrial Production (IIP), which includes the three components of manufacturing, mining and electricity, grew at a pace of 10.3 per cent during October. This is lower than what was expected, but higher than the 9.1 per cent for September. With this, the April to October growth rose to 7.1 per cent, up from 6.5 per cent in the April to September period. Manufacturing activity, which makes up almost 80 per cent of the IIP, grew at 10 and 11.1 per cent during September and October, respectively. Thus, there is sustained evidence of a pick-up in industrial activity, with a possibility of it clocking above 9 per cent for the whole year. The passenger vehicle segment recorded an astounding 61 per cent growth in November, albeit on a low base of last year, but spectacular nevertheless. Even two-wheelers grew at 42.4 per cent during November. Apart from vehicles, equipment, machinery and basic chemicals are also showing sharp growth rates. The latest IIP manufacturing component numbers broken down by industry groups are showing expanding activity in 16 out of 17 segments. Broken down by use-based classification, the numbers are showing comfortable double-digit growth in capital and intermediate goods as well as consumer durables. Demand for consumer goods has been steadily rising over the past five months. That is, the demand-side view of industrial growth is cause for optimism. That, in turn, could result in many industrial projects, currently on hold, getting re-started. The July to August quarter GDP numbers indicate investment levels remain robust and have risen as a proportion of GDP compared to the previous quarter.

This should lead to an increase in credit flow from banks — with credit growth slowing down sharply from 20 per cent to 10 per cent in the last five months, there was some doubt about the resilience of the recovery. Bank credit needs to be closely monitored, though the access corporate entities have to overseas funds as well as to capital markets, and the sharp increase in such funding, implies this may not be as binding a constraint. Gross ECB inflows were up sharply at $6.5 billion between June and September; and private placement of bonds and shares added up to Rs 70,000 crore in the year’s first half which is roughly double that in the same period last year. The strong showing in industrial growth, if accompanied by increased credit demand, would suggest the need for a tightening of monetary stance. Of course, RBI is well advised to tread with caution, even though the recovery is not-so nascent any more. An attack on reducing liquidity rather than raising lending rates through an increase in the cash reserve ratio could be a more prudent approach under the current circumstances. The global outlook has not improved much, with the exception of China and some parts of East Asia. Hence Indian industry will continue to derive sustenance largely from domestic demand, although improvements in exports are already visible.