The backdrop: Showing strong signs of recovery, the index of industrial production touched a two-year high of 11.7 per cent in November 2009

Recovery is broad-based

T he industrial production numbers were undoubt­edly helped by the base effect -which remains favourable till May 2010 - and the stimulus pol­icy. However, there are good rea­sons to believe that these strong numbers will be sustainable, even as policy makers make at­tempts at fiscal consolidation and anchoring inflationary ex­pectations.

First, the recovery is pretty much broad-based. Nearly 14 of the 17 industry groups showed positive growth in November over the year-ago period. Sec­ond, private consumer spending has revived from a low growth of 1.5 per cent to 5.6 per cent in last two quarters and it should average 7 per cent in the sec­ond half. Third, the average run rate for intermediate and capital goods in the last six months has been 13 per cent and 10 per cent. Fourth, manufacturing, which accounts for more than 80 per cent of the index of industrial production, has averaged 10 per cent in the last six months. How­ever, much will hinge on a cali­brated stimulus exit.

Private sector role key

E ven though a large part of the industrial recovery is fuelled by the fiscal stimulus, there are sufficient indications that investment and consumption are firmly on the revival path. Growth in the capital goods sec­tor averaged 12.2 per cent dur­ing Sep-Nov 2009 against 8.5 per cent during Sep-Nov 2008, pointing towards restoration of investment activity. Improv­ing consumer confidence can be seen by the strong growth in consumer durables sector. For this industrial revival to be sus­tained, further strengthening in private sector demand will be crucial, so as to mitigate the impact of expected reduction in government spending. Be­sides, the current growth in the production of capital goods will need to continue on a sustained basis over the next few months, to support the overall industrial recovery. The signs do seem positive on this front, as evi­denced by the D&B Composite Business Optimism Index for the first quarter of 2010, which witnessed an increase of 43.4 per cent on a yoy basis.