Manufacturing shines

The GDP figures released last week for the October-December quarter of 2004 (6.2 per cent growth) suggest that the Central Statistical Organisation may have to lower its estimate for growth in the financial year that has just closed.

In January, the CSO put out an advance estimate of 6.9 per cent GDP growth in 2004-05; but with data for the first three quarters showing 6.7 per cent growth so far, it is hard to see the number for the full year climbing to 6.9 per cent""unless the numbers themselves are revised, as is frequently the case.

What is important, however, is not whether the number for the full year settles finally at 6.9 or 6.8 or even 6.7 per cent.

The attention-grabbing part of the story is the momentum being displayed by the manufacturing sector, which has grown in October-December by a handsome 10.4 per cent (up from 7 per cent a year earlier).

At the same time, sectors like trade, hotels, transport and communications, and finance/real estate have maintained their healthy tempo, at 10.5 per cent and 8.1 per cent, respectively, in the latest quarter, while construction has accelerated to 8 per cent.

The slower sectors now are confined to personal/community services, electricity and mining (between 4.4 per cent and 5.8 per cent), while the decline in agricultural output is what has dragged the over-all number below 7 per cent.

If that last fact changes in the new year, and the tempo of the fast-growing sectors is maintained, then 2005-06 will prove to be a boom year.

The credit figures buttress that expectation, since the growth of non-food credit has been rapid and has even outpaced new deposits in the banking system""yielding an incremental credit-deposit ratio of more than 100.

What should cause worry is the sustainability of this tempo. For while the figures for cargo handled by the ports, the growth of air cargo and so on are all very positive numbers, a capacity constraint could be building up in the infrastructure area""notably in power supply, but also in transport.

Railway wagons are already in short supply, while road congestion is a fact of life. The other danger, given the rapid credit growth last year, is of tightening liquidity and rising interest rates which could then choke both consumer demand and investment decisions, but so far there is little sign of money being put at a great premium.

The full picture will be known when the Reserve Bank governor makes his credit policy known, but so far there is no reason to expect any significant hike in interest rates.

Banks continue to hold more government securities than they are obliged to, and can offload these to build new assets through lending to get better yields than the G-secs provide.

The external picture also looks sound, with foreign exchange reserves climbing significantly during the year and continuing to outpace external debt.

However, the rising current account deficit (the result primarily of the high oil prices) may become a matter of concern""because this deficit threatens to touch between 3 per cent and 4 per cent of GDP.

Inflows of capital have so far more than covered this deficit, but given the potentially fickle nature of some of these flows, a high current account deficit should be a matter of latent concern.

Nevertheless, all that the economy needs in the new year is a good monsoon; GDP growth in 2005-06 then will be back in the 8 per cent zone after a one-year gap.