New Delhi: Powered by manufacturing, industrial production in the country rose by 13.6% in the first month of the current fiscal year.
While manufacturing grew at 15.1%, the mining and electricity sectors grew by 3.4% and 8.7%, respectively, says a release issued by the Central Statistical Organization of the ministry of statistics and programme implementation. The revised annual industrial growth for 2006-07 has been pegged at 11.5%, while for manufacturing it is 12.5%.
On the face of it, the data suggests that the credit squeeze imposed by the Reserve Bank of India (RBI) is yet to impact the growth momentum in the economy.
However, as economists point out, the current surge is being led by sectors, financing their investments either through domestic offerings of equity and debt together with external commercial borrowings (ECBs), rather than taking recourse to bank credit.
“Consumption and investment demand are independent. Most of the liquidity is getting absorbed in the retail sector. Investment demand is being satiated by going outside the system (through equity or ECBs),” says Jammu and Kashmir Bank Ltd‘s chairman and chief executive officer Haseeb Drabu.
The use-based classification data released along with the industrial production data reveals a double-digit surge in production of capital goods by 17.7%, intermediates such as steel by 12.6% and consumer non-durables such as cosmetics and services by 21.9%.
However, growth in production of consumer durables such as automobiles and television sets, which are directly affected by the rising cost of credit, rose by 5.3% after averaging 9.1% in 2006-07.
Some believe that the data also reflects growing consumer confidence.
“The growth in consumer non-durables is an indicator of how the average household feels about the future; it’s not a bad measure of consumer confidence. Non-durables reflect a change in lifestyles, when it comes to capital expenditure,” said Pronab Sen, India’s chief statistician.
Further, he suggests that the surge in production capacities, reflected in the double-digit growth in capital goods and intermediates, is beginning to catch up on demand in the economy. “Capacities started a couple of years earlier may have started coming on stream; therefore, overheating may not become a concern,” he reasons.
The continued surge in industrial production has triggered fears in some quarters that the central bank would effect another round of interest rate hikes. So far, it has raised its rates nine times since October 2004 and hiked the cash reserve ratio three times since December 2006, as a measure to curb excess liquidity. Consequently, commercial banks have increased their lending rates at 250 basis points since December 2006.
Currently, credit growth has slowed to 26%, compared with 30% at the end of May last year. The inflation rate as measured by the wholesale price index, too, moderated to 4.85% for the week ended 26 May.
According to Shashank Bhide, senior research counsellor, National Council for Applied Economic Research, the data is largely a reflection of more than 10% industrial growth in the last quarter of 2006-07.
“I believe this momentum can be sustained,” said Bhide. “While the high growth in capital goods sector is a reflection of increased investments, in the consumer goods sector it is due to increased domestic demand as also increased export activities.”
Sen, who says he believes bank credit has never been a major source of term finance, maintains that the hike in interest rates would not trigger a significant slowdown in capital goods. RBI data shows that ECBs in 2006-07 were largely on account of investment demand.
In the April-December 2006 period, ECB inflows were $9.1 billion (Rs37,310 crore), higher than inflows of $2.72 billion for all of 2005-06.
Again, according to Prime Database, a New Delhi-based independent research outfit on primary markets, aggregate borrowing (including banks and PSUs) through private placement in 2006-07 rose by 13% to Rs92,355 crore. In the same period, equity offerings mopped up Rs24,993 crore, the highest ever in the Indian capital market.