Industry's first quarter growth is closely linked to the full year's growth -- in which case, write off this year.

With higher interest rates putting pressure on both the demand and supply sides, there is a lot of concern about whether industrial growth will pick up.  

On the demand side, fewer goods are demanded that depend on credit such as automobiles, consumer durable goods, and housing. This in turn affects the output of these industries, causing them to cut back on investment which slows down overall growth.

On the supply side, higher interest rates make borrowing expensive and companies defer investment plans. Holding costs of inventory increase and affect the bottom lines of companies.

The most recent number for industrial growth has been put at 5.2 per  cent for the first quarter of the year. What is one to make of it? Relative to last year, this number is quite low as it was 10.3 per cent last year. The high base year effect is a plausible explanation, though there is still considerable scepticism about this.

Does this mean that growth will be low by the end of the year? At a theoretical level, the period up to August or so is considered to be the slack season because typically one would not be spending too much on consumption goods during this period.

Normally, people spend more during the festival season that starts from August onwards. We have Raksha Bandhan, Janmashthami, Ganesh Chathurthi (in the west), Dassera, Diwali, Christmas, and New Year that are associated with festival spending.

This happens all across the country where people invest in a variety of things, right from clothing for the family to dwellings. The idea being that purchasing is associated with an auspicious occasion.

As we move to rural areas, the harvest factor also plays a role. Typically the kharif harvest begins in October or so and goes on through till December. It begins again in the months of April and goes on till May when the rabi harvest begins.

Therefore, spending again increases from the Baisakhi-Holi time, albeit at a slower rate since festival season is over. Against this background, the argument goes, one should not be startled at a lower industrial growth rate in the first quarter of the year as this is how it should be.

This was the school of thought for a long time when the RBI also called its credit policy the slack season policy from April to October and the subsequent period was called the busy season.

In fact, in the past, there was a tendency for the RBI to try and complete 60-70 per cent of the government's borrowing programme in the first half of the year when there was less demand from the commercial sector.

However, in the last decade or so, the RBI has given up differentiating between the two seasons as the tendency for spending has evened out through the year.

Therefore, demand for credit today is considered to be an element that needs to be monitored throughout the year and hence deserves attention. It is not surprising that the RBI has resorted to monetary action at any time of the year unlike in the past when the second half mattered more.

In fact, it is often said that the quickest way to gauge economic confidence levels in the country is to count the number of "sales" that are going on around in the country. Usually, as stated earlier, these discount sales are meant for the festival season where dealers compete to garner a greater share of the consumers' wallet.

However, this year, the competitive discount season has begun earlier for all the consumer goods segments. This holds for automobiles and housing projects too where the spectre of higher interest rates in the future is being used to attract customers to get into deals immediately. Independence Day has now become a landmark day for potential customers!

In this context it would be useful to see how annual growth in industrial output has behaved relative to the growth in the first quarter. More importantly, is it possible to conjecture the extent of overall growth based on the information of first quarter?

As can be seen from the table, there is very strong correlation between the growth rate witnessed in the first quarter of a year and the growth for the entire year (around 85 per cent). Low growth in the first quarter invariably translates into a low growth for the entire year, while a high growth rate may not necessarily do so.

Hence, looking at a growth rate of 5.2 per cent in the first quarter, based on past experience, it may be conjectured that industrial growth for the entire year would be at best between 6.5 per cent and 7 per cent.

Coincidentally, the projections of the Economic Advisory Committee of the PMO (EAC) had scaled down GDP growth projection for the year to 7.7 per cent and that of industry to 7.5 per cent. This could be attributed to both the high interest rate regime as well as the high base year effect where industrial growth has been greater than 8 per cent for four successive years while peaking at 11.5 per cent in FY07.

In which case, we need to revisit the calculations for GDP growth this year, where the monsoon will be critical as agriculture will play a decisive role in determining the final figure.

With a 7 per cent growth rate and a 20 per cent share in GDP, industry will contribute a maximum of 1.4 per cent to GDP growth, while agriculture with a share of 17 per cent will need to clock 4 per cent to add another 0.7 per cent. We would still be need services to grow by 9 per cent to end up with a final number of 7.8 per cent. Can this be done?

The author is chief economist, NCDEX Limited. The views here are personal.