Hidden reserves

The Index of Industrial Production (IIP) for July 2006 indicates a sharp surge for the sector as a whole. Industrial output grew by 12.4 per cent over the corresponding period of the previous year, substantially higher than the growth rate during the April-June quarter. Part of this is easily explained. For some reason""most likely widespread flooding in heavily industrialised parts of the country""the growth rate in the index had dropped below 5 per cent in July 2005. However, even after accounting for this, the fact remains that the industrial sector is well on track for 9-10 per cent growth for the year, unless there is a sharp deceleration in the second half, for which there are no indications so far. Of the three components of the index""mining, manufacturing and electricity""manufacturing, which has about an 80 per cent weight in the overall index, has been the main driver for the last several quarters. In the last few months, mining and electricity, while still lagging behind, appear to be increasing their contribution. From the perspective of power availability as a potential constraint to sustaining growth, this may ease some concerns about the immediate future.

What is heartening about the ongoing expansion is its relatively broad base. The momentum is coming from a number of sectors, which suggests that a number of drivers are at work simultaneously. According to the use-based classification, consumer goods as a whole grew by almost 18 per cent, although on a low base of less than 5 per cent. More importantly, capital goods grew by over 15 per cent on a rather high base of about 15 per cent last July. Focusing on individual industries, textile products, machinery and non-metallic mineral products performed respectably, growing in the 10-15 per cent range, while metals and transportation equipment hit the 20 per cent mark.

At the end of the first quarter, the industrial numbers had made it almost certain that GDP would grow by over 8 per cent during the quarter. The July numbers suggest that the momentum will carry strongly into the second quarter as well. While this is generally good news, it places policy-makers in something of a quandary. For the last several quarters, the Reserve Bank of India (RBI) has been warning of an overheating economy, with accelerating inflation an inevitable consequence. It has pursued a gradual, calibrated policy of increasing interest rates, designed to rein in GDP growth to the 7.5-8 per cent range, which it apparently believes is sustainable. However, the economy seems hell-bent on disproving the validity of this perception, and shows no signs of responding to the RBI's signals. What rising interest rates don't seem to be doing, one might have expected oil prices to do. But, keeping in mind the incomplete pass-through, they don't seem to be doing it, either. The first- quarter profit numbers from the corporate sector also displayed a seeming invulnerability to these rising cost elements. All this suggests that producers in the economy are able to dig deep into their hidden reserves of productivity and efficiency to sustain this powerful momentum in the face of increasingly visible constraints. They probably won't last for ever, but they have provided enough juice to help India cement its place as the second fastest growing economy in the world. The most must be made of them while they last.