The Industrial Sector in India - Rising Fast

Back in September last year I reported on a big and very comprehensive piece in the NYT about how the industrial sector was beginning to expand rapidly in India. Specifically, the NYT piece noted surprisingly how two-thirds of FDI in India the past year had been going into the industrial sector rather than the service sector as it has been traditionally thought in terms of India's global comparative advantage in a large bulk of back-office services. A chunk of the recent economic data coming out of India mirrors this as the industrial production rose a whopping 14.4% in November compared to the same month last year. However, more interestingly it also raises the questions about Indian growth and whether the economy is overheating? What is particularly important to note here is how consumer spending is a major and indeed rising driver of growth a fact which is quite expectable given India at the moment is passing through its demograph dividend. This of course also suggests that the idea of trend growth and thus overheating/inflationary pressures in India needs to be conceptualized on the basis of this.

(From Bloomberg linked above)

India's industrial production expanded at the fastest pace in 11 years in November, giving the central bank further reason to increase interest rates this month to curb inflation.

Production at factories, utilities and mines rose 14.4 percent from a year earlier, the fastest since September 1995, after gaining a revised 4.4 percent in October, the Central Statistical Organisation said in New Delhi. Analysts expected an 11.3 percent increase.

Demand for cars, mobile phones and homes has expanded amid the 13.8 percent increase in salaries and bank lending in Asia's fourth-biggest economy, spurring Volkswagen AG and Vodafone Group Plc to expand in India. Rising consumer spending may stoke inflation, prompting the central bank to raise its 6 percent benchmark rate as soon as Jan. 31.

``The production figures will put more pressure on the central bank to tighten,'' said Robert Prior-Wandesforde, an economist at HSBC Holdings Plc. in Singapore. ``Industrial production clearly remains very strong, with absolutely no sign of any slowdown.''

(...)

Demand for loans is rising as India tops a global consumer confidence index of 40 countries for the third year in a row in 2006, according to AC Nielsen Co., a New York-based market research firm. Bank loans are growing at 29 percent, after expanding an average of more than 35 percent in each of the previous two financial years, according to central bank data.

``There are clear signs of consumer demand picking up,'' said K. Ramanathan, who manages the equivalent of $561 million in Indian debt at ING Investment Management Pvt. in Mumbai. ``Pricing power is returning back to the manufacturers. Inflation will inch up.'