Promising signs

The over 10 per cent growth in the Index of Industrial Production (IIP) for the month of August, released on Monday, is a sign of the higher momentum being gained by the economy since the beginning of this year. The figures started getting better from June, when it was 8.2 per cent, through July’s 7.2 to 10.4 per cent in August. There is an almost five-fold increase in August from the 2.1 per cent growth in May. It can be assumed from the consistently impressive performance that the slowdown is not only behind us, but that the growth rate is accelerating. The second quarter GDP growth rate is also likely to be higher than expected, as forecast by the finance minister. The stock markets have already responded enthusiastically to the confirmation of the turnaround.
The fact that the growth is across the spectrum is also reassuring. Fourteen of the 17 segments of the manufacturing sector registered good growth in August, with seven of them gaining more than 10 per cent. Sectors like chemicals grew as much as 14 per cent. Among the better performers was the textile sector which affects millions of people as it is highly labour intensive. The industry, which was down in the dumps for many months, grew by 16.4 per cent. Though textile exports are yet to show any significant improvement as international markets are yet to pick up, domestic demand has started growing. The Pay Commission handouts helped the consumer durables sector to move up by 22.3 per cent and the demand push is likely to continue, as the second installment of the salary arrears has just been paid.

Fiscal sops and the various economic stimuli given by the government were in good measure behind the good performance of the IIP. The low base effect also to an extent exaggerated the pace of recovery. All the sectors have not performed uniformly and there are still laggards. All these are sufficient reasons for keeping the fiscal and monetary props intact for some more time. Interest rates will need to be kept low, till the time it is clear beyond all doubt that there is no sliding back, so that there is easy credit, enough liquidity and sustained demand. There is no serious danger of inflation either, though mismanagement by the government has pushed up some prices. In any case, growth with some inflation is better than a slowdown with steady or falling prices.