IIP at 8.4%: Why the 25-month high figure needs to be taken with a pinch of salt before confirming revival
On the face of it, the sharp 25-month jump in IIP is triggered by significant revival in manufacturing segment.
Is an economic revival round the corner? The November factory output numbers gives a hope to a section of economists and growth-lobby. Certainly, at 25-month high of 8.4 percent, the Index of Industrial Production (IIP) has surprised many economists on the positive side. To be sure, there is a reason for this optimism. This isn’t the only number that has thrilled the growth lobby in the recent past. There were few other indicators too that announced the signs of a pick-up in economic activities.
Growth across eight core sectors hit a 13-month high in November—at 6.8 percent, faster than 4.7 percent in October and higher than the 3.2 percent recorded in November 2016. The eight core industries comprise of nearly 38 percent of the weight of items included in the index of industrial production (IIP). Hence, in an earlier column this writer had pointed out that the improved core sector numbers may reflect in the IIP print.
Secondly, manufacturing PMI also expanded at the fastest pace in five years in December, buoyed by a rise in output and new orders. Third, truck sales revived in a significant way in December. That is a bit unusual since typically passenger vehicles dominate automobile sales as this Business Standard report points out. All these indeed sound positive for the second half of the economy. If these trends sustain, the CSO estimate of 6.5 percent GDP (gross domestic product) for the full year can very well be revised upwards.
Even though a setback on the growth front was expected in the aftermath of demonetisation and GST impact, the 6.5 percent figure came as a disappointment to many as it was lower than the RBI (Reserve Bank of India) estimate of 6.7 percent and government’s own earlier estimates. If the year indeed ends with 6.5 percent, it would be the lowest yearly growth figure ever since this government came to power and a major negative mark on the records of the Narendra Modi-government. That will put the Modi-administration on the back foot politically in a crucial election year and ahead of 2019 Lok Sabha polls.
The decline in growth figure from 7.1 percent in last year to 6.5 percent this year will be difficult to explain even with the counter that temporary pain is inevitable in a year of reforms and disruptions.
In this backdrop, the recent economic data would have come as a relief to the government. But, is the November IIP data as good as it looks? This is a tricky question.
The segment grew by 10.2 percent in November as compared with 2.2 percent in the month before.
Construction sector too has performed well marking a 13.5 percent growth as against 5.5 percent in the previous month. Consumer non-durables, another critical segment, registered a growth of 56-month high. This segment grew 23.1 percent in November as against a growth of 7.9 percent in the month before.
If one looks closer into the numbers, the biggest contribution to the index has come from Digestive enzymes and antacids (including PPI drugs), which contributed 2.5497 to the IIP. On the other hand, the industry group ‘other manufacturing’ has shown the highest negative growth of 15.9 percent followed by a negative growth of 13.1 percent in ‘Manufacture of wearing apparel’ and negative 11.2 percent in ‘Manufacture of electrical equipment’ segment. Similarly, growth in electricity segment has not been very impressive at 3.9 percent when seen against growth in the year-ago period at 9.5 percent and despite a slight uptick from 3.2 percent in the month before.
The point is, if one keeps the digestive enzymes and antacids component out of IIP, the figure will be 5.9 percent, not 8.4 percent. This is something economists have pointed out. “Overall the figure is good but unless it sustains for three months at least, we can’t talk of a revival. Also, certain components such as pharmaceuticals have shown high growth due to restocking which has positively impacted the numbers,” said Madan Sabnavis, chief economist at Care rating agency.
In other words, what this means is that the November IIP growth figure is skewed on account of certain factors and the 8.4 percent figure needs to be taken with a pinch of salt. Having said that, even a 5.9 percent figure is an improvement from the previous months and, if it sustains, can signal revival in the economy.
For full coverage of Union Budget 2018, click here.
(Data contributed by Kishor Kadam)
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