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Industrial growth - The lurking danger

Apr 12, 2000

The Central Statistical Organisation (CSO) must have been all smiles at the time of releasing the quick estimates for industrial growth for February 2000. Sorry to spoil the party but...Capital stock. It determines the productive capacity of an economy. It’s where savings of large number of individuals and corporate get channeled. And it is also a barometer of the economic environment - a bright future will stimulate investment activity, as investors would like to capitalise on future demand.

And as you might have guessed by now, that’s where the problem lies. The sluggishness in the capital goods sector highlights the fact that investment activity in domestic markets has yet to pick up (using imported capital goods is an open option, but forms only a small part of the total). As growth in both the gross domestic product (GDP) and industrial output has been robust, one comes to the conclusion that the revival is consumption led. The fact that various companies are cranking up production to meet demand points to the possibility that in future the demand supply gap may narrow, thus having price (inflation) implications.

A case in point is the cement sector. In two years’ time the sector is likely to witness a marginal deficit in output. Already expectations of higher price realisations have driven analysts to flag cement stocks as ‘BUY’ (that they have failed to appreciate is another matter).

The recent release fails to highlight this growing concern largely due to the fact that capital goods sector has little weightage in the index of industrial production. It is unlikely that slower growth in capital goods sector will jeopardize economic growth, as there are indications that investment activity may be about to take off. Indeed some will argue that a large number of sectors have surplus capacity and therefore there is no need to worry. Nevertheless, any failure on this front will have serious implications for the economy.

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