The growth in the IIP for October at 10.8% year-on-year may seem a stunning number compared with the poor 4.4% year-on-year growth seen in September. However, monthly data tends to be uneven for a variety of reasons, in this case the festive season setting in later this year than in 2009. What?s more reassuring is that the average between April and October 2010 is a strong10.3%. This pace should, of course, taper off with the high base effect coming into play from December, and so for 2010-11 as a whole the IIP would come in closer to 8.5%. The good news in the November numbers is the growth in capital goods index which grew a strong 22%. The GDP numbers for the September quarter had reflected good gross capital formation at a strong 11%. A glance at what has driven the capital goods index so much higher shows a pick up in items relating to the power sector apart from a spike in shipbuilding and offshore platforms. As Samiran Chakraborty, regional head of research at Standard Chartered Bank, says gross capital formation, which has averaged around 15% in the last couple of quarters, needs to happen at a higher 20% kind of level, for the economy to be able to clock a 9% growth number. Indeed, as Chakraborty asserts, there needs to be more capacity creation across other sectors, it?s been somewhat soft; most of the investments are happening in the infrastructure space. Also, it?s possible that growth in the consumer non-durables segment, which has seen sluggish for 16-18 months now, could be bottoming out and will be a kicker for the IIP going ahead because the weightage, at five times that for consumer durables, is meaningful.
While the going so far hasn?t been too bad and the economy is likely to grow at 8.5 plus levels this year, there are a few concerns. The first is tight liquidity which needs to ease as soon as possible and for which government spending needs to go up quickly. There are those who believe that money may be in short supply even if the government spends. An equally important problem is high interest rates which will remain high unless inflation comes off meaningfully. The RBI governor says the central bank is not comfortable with current levels of inflation of 8.5%. While the central bank is unlikely to increase rates when it meets next week— monetary transmission is clearly happening with several banks increasing their lending and deposit rates— the consensus believes that policy rates could be upped another 50 basis points next year. At some point, higher interest rates could impact large, long gestation projects, especially if rates are hiked very fast, but if promoters are confident that demand will sustain they may go ahead with their expansion plans. Essentially, industry is waiting to see how soon global recovery pans out. One of the biggest concerns is high crude oil prices; while prices came off a little after China announced a 50 basis points increase in reserve requirements, it?s possible they could stay at $90 a barrel given the abundance of liquidity. Even with stable commodity prices, the RBI?s inflation target of around 5.5-6% by March next year was always going to be hard to achieve. Should prices of fuel flare up, inflation would end up at higher levels.
