It is easy to think of the impressive 17.6 per cent increase in the April-on-April growth rate of the index of industrial production as the product of what statisticians call the base effect. Clearly, the low base of April 2009 did make the difference. However, the robust numbers for April 2010 do indicate a new trend in industrial activity. This is underscored by the fact that the capital goods sector has experienced a phenomenal 72.8 per cent growth, no doubt partly due to the base effect but also, and very clearly, because of a revival in investment activity in the country. The Indian economy has recovered from last year’s global slowdown and the political uncertainties of mid-2009, as well as the impact of last year’s drought and floods. There is an impressive rise in the savings and investment rates as well as in foreign capital inflows. It is entirely possible that the year may well end with closer to 9 per cent growth (finance minister Pranab Mukherjee had stuck his neck out and claimed this year the economy would grow at 8.75 per cent and he may well be proved right). Whether this revival of growth is driving inflation remains to be established. But it is clear that rising demand is beginning to impact on the price line. The higher than expected rate of inflation, as revealed by data released this Monday, may not yet suggest overheating but does point to that threat to growth. How the central bank will respond to these demand-side pressures remains to be seen.
While inflationary pressures have not yet been fully vanquished, one must not lose sight of the fact that an equally important part of the current macroeconomic story is the revival of manufacturing activity, fuelled by rising investment. The sustained rise in non-oil imports also points to rising investment activity in the economy. Interestingly, a significant part of the growth in capital goods output has been in the power sector, pointing to implementation of new power projects that have been in the pipeline for sometime. Expectations are that by 2011 there could be a perceptible improvement in the power supply situation. This would further ease the constraints on growth and contribute to its sustainability. If the government can remain focused on speedy implementation of infrastructure projects, especially roads, railways, power and urban services, the current growth acceleration could take the economy to double-digit growth rates sooner rather than later. Apart from the monsoons, the other imponderables that could yet spoil the growth party would be the global economic situation and the regional security situation. If Europe, Japan and the United States could improve their growth prospects and avoid a double-dip recession, the external environment would also be supportive. The challenge for policy-makers at home is to be able to deliver double-digit growth even if the external environment is not too supportive.
