The official IIP has been on a roll in recent months. The year-on-year growth rates were close to 17% in December 2009 and January 2010. Acceleration in growth rates began in June and in six months it has reached levels that are exceptional. The Y-o-Y growth rate in IIP has never stabilised around a level as high as 17%. So, is the current growth rate also unsustainable?

There is no logical reason why growth cannot accelerate to 17% or more and continue to grow at such levels for a long time. India?s per capita consumption levels are low enough to expect ample headroom for growth, and corporate India is investing enthusiastically to build new capacities that will create the supply and the demand to fuel such an accelerated growth. Yet, doubts linger about the sustainability of the 17% growth reflected in the IIP. These arise because of the CSO?s inability to assure us of a well-measured IIP. Problems of old weights and a creaky implementation continue to spook the IIP. Data problems continue, but these seem to be less problematic compared to the situation a couple of years ago. It is imperative that the CSO release the new IIP at the earliest to remove all doubts about the reliability of this important measure.

Is this spike in growth a base effect? December 2008 and January 2009 bore the brunt of the global liquidity crisis. IIP growth was negligible in these months. However, the seasonally adjusted series (produced by Ajay Shah and his colleagues) also show impressive growth rates. So, this is not merely a low base effect at work. The growth is real. The main source of the acceleration in the IIP is the extraordinary growth in the index for capital goods. Y-o-Y this grew by 39% in December and then a whopping 56% in January.

The capital goods sector is full of products whose output is often lumpy. The wild gyrations in their output often cause extraordinary growth rates. This is influencing the growth rates around now. For example, the biggest source of growth in the capital goods index is the production of broad gauge covered wagons, whose production grew by over a 1000% in November and then by 345% and 529%, respectively, in the following two months. Production has increased from less than 100 wagons last year to 500-600 this year.

Equally significant is the 200% growth in the production of commercial vehicles in December and January. This growth matches the data published by Siam. And, more significant is similar growth (around 200%) in shipbuilding because of its greater weight in the IIP. Production has increased from around Rs 300 crore a month last December-January to around Rs 1,000 crore this year. These are large increases that have had a big impact on the overall growth of the IIP. But, these are possible and need not elicit cynicism.

Within the capital goods segment, the production data for textile machinery and insulated cables are clearly inaccurate. The first seems to be a methodological issue and the second is a data reliability issue. But, both carry small weights and so they do not impact overall growth numbers. CMIE has consistently maintained that the investments momentum that began in late 2004 has continued save for a very brief interruption immediately following the global liquidity crisis in 2008. Currently, the pace of implementation of new investments is possibly running at its highest. The acceleration seen in the Capital Goods Index, prima facie, is thus a confirmation of CMIE?s claim, which is based on its own Capex database.

The Capex database shows that projects worth Rs 4 lakh crore will be commissioned during 2009-10. This is 36% higher than the Rs 2.9 lakh crore worth of investments that got commissioned in 2008-09 and 126% higher than the average of Rs 1.8 lakh crore worth of projects that were commissioned annually during 2005-06 through 2007-08.

The global liquidity crisis of September 2008 did not dampen the growth in creation of new plants and machinery. Further, we expect the growth to continue in 2010-11. According to the Capex database, Rs 6.5 lakh crore worth of investment projects are expected to be commissioned during the year. A majority of these projects will be coming up in the infrastructure segment. Investments worth Rs 1.4 lakh crore will be commissioned in the electricity sector. An estimated 21,355 mw of additional power generating capacity is expected to be set up in 2010-11. This is twice the 10,530 mw expected to be commissioned in 2009-10, which itself is twice as high as the average of 5,000 mw added per year during 2005-09.

The construction, roadways and metals sectors will also see significant capacity additions during the year. Eleven million tonne of steel producing capacity and 40 million tonne of cement producing capacity is expected to be commissioned. While the commissioning of fresh capacities continues relentlessly, there is also a continuous flow of new investment proposals from the industry. During January and February 2010, new investment proposals worth Rs 2.7 lakh crore were announced. This compares well with the Rs 9.2 lakh crore worth of new proposals made during April-December 2009. This continued increase in new capacity creation is the best indication of the confidence that enterprises have on India?s future. They are betting their monies on a market they expect will grow exponentially. Unlike China, India?s investment boom is not driven by a fiscal stimulus. We do not have to fear an exit policy.

The author heads Centre for Monitoring Indian Economy