A 16.7% growth in the Index of Industrial Production (IIP) in January 2010 shows that high growth rates, even if bolstered by the low base year impact, are here to stay. What is most remarkable about the latest figures is the 56.2% growth in the capital goods output, the highest ever recorded. And unlike the overall industrial growth rate, this surge in demand for investment goods has less to do with a low base year effect as growth was a respectable 15.9% in January 2009. To put this in perspective, one should note that the highest increase in capital goods production even during the much acclaimed pick-up in the mid-1990s was only less than half the current level. And the extensive nature of the demand for investments or capital goods is indicated by the trends in both machinery and equipment and transport goods, which account for a substantial part of the capital goods sector. While growth of machinery and equipment touched a new high of 45.9% in January, which is substantially higher than the peak levels of 36.2% achieved in the mid-1990s, that of transport equipment touched 57.6%, which is still further ahead of the peak rate of 32.2% achieved in the mid-1990s. Such a substantial pick-up in demand for investment goods means a major change in the fortunes of the economy as it indicates that adding new capacity and modernisation of existing capacities has become the top priority for industry, unlike at the start of the financial year when less than optimistic expectations even shrunk the capital goods output.
While mining and manufacturing have also contributed to the resurgence in industry, the only discordant note is from the electricity segment where the pick-up in production has been less than one-third the pace of the overall increase in industrial output. In fact, the review of the economy by the Prime Minister?s economic advisory council just a few weeks ago has flagged this problem and noted that power constraints will emerge as a major hurdle in utilising the full potential of the manufacturing sector in the medium term. Another constraint that has emerged is the sharp slide in demand for consumer non-durables or articles of daily consumption, where output has even declined in January for the first time in eight months. But this trend is likely to be reversed as the marketing of the rabi crop begins in April. A continued accommodative monetary policy stance for a while longer will help sustain the current optimism.
