The IIP recorded a growth of 11.7% in November, as compared to 2.5% growth for the same period last year. This comes on the backdrop of 10.4% growth in October and the IIP growth has crossed double digit figure in three out of the last four months. The overall growth for the eight month period (till November) is 7.6%, nearly double the 4.1% growth for the same period in the previous year. While a good part of manufacturing growth can be attributable to stock building, what is important to note is impressive growth recorded by the capital goods sector. It grew by 12.2% in Nov’09 as against a mere 0.5% growth in Nov’08. Overall, the sector grew by 7% during the eight month period.
Indications are that the growth will continue to be robust next few months, given the low base effect. On the basis of this, I am upping my GDP growth forecast for the full year from 5.9% to 6.5%.
The downside to this is the likely increase in interest rates, sooner rather than later. Improved growth scenario and comparatively high inflation rate (even if it moderates, I am inclined to believe that the inflation rate will be sticky downward) will be a potent combination for a tighter monetary policy. In this context, it is also important to note that the economy is still critically dependent on the stimulus and the withdrawal, as and when it happens, will add a lot of stress to the economy, especially in the scenario where the deficit is going to remain high. Added to this is that fact that the mess that the global economy has been in, is yet to be cleared off. While there seems to be some semblance of recovery, the pain is far from being over. Europe is in big trouble apart from a few pockets. Japan hardly matters. The US is not yet out of the woods, as the latest unemployment numbers reveal.
Rising interest rates, high deficit, potential withdrawal of stimulus along with preponement of demand to the current financial year due to the stimulus, global growth risks – all conspire to a not too rosy a scenario going forward. India is definitely in a better shape as compared to others, but reverting back to the 9% growth rate is not going to happen soon. I am expecting a 7% GDP growth during FY11.