Still growing, but...

Mixed signals abound in the data released by the government last week. First, the ministry of agriculture announced revised estimates of crop production during 2004-05, which will lower the base for that year and push up the growth rate for 2005-06, thereby raising the bar for the current year. The specific impact of this revision is likely to be quite small, but it adds to the rather confusing range of signals coming from various economic indicators. While there is a relatively broad consensus that GDP will grow by around 7.5 per cent during 2006-07, it appears that some of the key assumptions underlying this optimism are under threat. This hasn't begun to show up in performance measures yet. But is this because the factors pointing to a slowdown are being offset by strong countervailing influences, or is it only a matter of time before they take their toll on growth?

Both industrial production data and corporate performance numbers for the last quarter (January-March) of 2005-06 do not provide any indication of the momentum running out. Profitability for the corporate sector as a whole is very much in line with the recent healthy trends, in fact bouncing back after a minor negative blip during the previous quarter. And the Index of Industrial Production (IIP) numbers for March, released last week, showed the manufacturing sector growing at 8.9 per cent over March 2005, taking the growth rate for the year as a whole to 9 per cent, which is close to the previous year's performance of 9.2 per cent. The IIP as a whole slowed to 7.7 per cent during March 2006 and 8 per cent for 2005-06, down from 9.8 per cent and 8.4 per cent from the comparable periods in 2004-05. However, this was entirely due to a rather sharp reduction in the growth rate of mining. Since minerals are largely importable, slackening domestic mining activity should not act as a supply-side constraint on growth. The same cannot be said about electricity, which is the third component of the IIP; however, the numbers show growth in the generation of electricity; though it slowed moderately from the previous year, it grew at over 5 per cent during 2005-06. Summer discomfort for millions may be, but not yet a complete drag on growth.

So, the strong momentum appears to persist and it is perhaps too early in the day to be talking of negative portents. But it would be wise to keep a sharp eye out for the looming trouble-spots. First, there is no way in which the government can resist increasing domestic prices of petroleum products, when there are no indications whatsoever that crude prices will come down in the months ahead. Second, interest rates, particularly in the retail segments, are rising rather rapidly. Considering the contribution of retail finance to the recent growth momentum, this is likely to be a significant detractor from the growth rate. Third, related to the oil scenario, exports, also a major contributor over the last few years, will be hit by a possible global slowdown. Of course, the economy may be resilient enough to withstand all these eventualities, but one is likely to find fewer people betting on this as time passes.