The 11.7% rate of growth registered by the Index of Industrial Production (IIP) in November 2009, the highest in the last 25 months, shows that the economy is finally moving from resilience to strength. Industry has posted double-digit growth in three of the last four months. Even export trends have turned decisively positive over the last two months. Is it, therefore, time to begin rolling back stimulus? Yes and no. There is still need to be cautious about the growth numbers in the IIP?the double-digit growth has been clocked on a very low base year growth. Also, the structure of growth has been uneven with most of the gains confined to certain segments. In consumer durables, for example, growth has been high following the salary hike of government employees, as recommended by the pay commission, and the attractive EMI schemes worked out by banking and non-banking financial intermediaries for automobiles and other white goods. This has pushed up growth of consumer durables from 17.6% at the start of the fiscal year to 37.3% in November.
But the growth of demand for articles of daily consumption in the non-durable consumer segment continues to be erratic, with growth now slumping to a five-month low of 3.1% in November. Similarly, though the pick-up in investment demand has been significant with capital goods growth crossing over to double digits in the last three months, it is still far short of the close to 20% growth averaged in 2006 and 2007. And the growth linkages are still not strong enough to warrant a full reversal of policies. While the recovery in intermediate goods, which include oil, chemical and ancillary products, has been encouraging, with growth touching 19.4% in November, the signals from the basic goods sector, which includes metals, cement, fertilisers and electricity, remain weak with growth hovering around 6% during the last three months. So, for now, any move to roll back the stimulus should focus on the fiscal side?the government had reduced Cenvat by 4 percentage points and followed it up with a cut in general rates from 10% to 8%. In auto, in particular, there is no need for a fiscal stimulus anymore. The withdrawal of tax concessions will also stem the unexpectedly sharp fall in gross tax collections and help lower the revenue deficit. But with the flow of bank credit slowing down to 7% in the current fiscal, any move to tighten monetary policy at this stage will be premature and likely to hurt.