Industrial growth dips to 2.7%: Is it dodgy stats or weight of inflation?

Is inflation crushing demand for manufacturing goods in India or is it that blips continue with government statistics?

Data released on Wednesday said the Index of Industrial Production (IIP) for November crashed to a mere 2.7%, compared with 11.3% in October.

The manufacturing sector, which has an 80% weightage in the index, grew a dismal 2.3% during November, compared with 12.3% in the corresponding month a year ago. While there are some who think inflation is beginning to hurt demand, more experts think the numbers are not on the ball.

Abheek Barua, chief economist, HDFC Bank, said the rise in food prices could be having an effect on the disposable income of the consumer which, in turn, is leading to lower expenditure on (or demand for) consumer non-durables. “Also, the liquidity shortage leading to high cost of borrowing. A combination of various factors led to the drastic fall,” Barua said.

But A Prasanna, economist with ICICI Securities Primary Dealership, said the IIP numbers have been very volatile in the last 6-8 months. “So I feel there is a problem with data collection. This current IIP basket has outlived its utility, so we can ignore it. Very soon, the IIP basket will be changed and the new one will be more stable and comprehensive,” he said. The new series would include about 150 new items, while excluding the obsolete ones such as production of loudspeakers, typewriters and VCRs.

Prasanna said the Reserve Bank of India (RBI) will hike the repo and reverse repo rates by 25 basis points each in the January 25 review of the monetary policy.

Taimur Baig and Kaushik Das of Deutsche Bank agree IIP data has been extremely volatile in 2010, with the standard deviation about 50% higher than that seen during 2005-09.

“As a result, one month’s poor out-turn tends to be succeeded by a strong one. In any case, the post-Diwali bounceback is historically strong. Given the noise in the data, we don’t expect India’s policymakers to pay much attention to Wednesday’s data outturn. Credit growth, retail sales and trade data suggest that the economic momentum is fairly robust,” Baig and Das said in a note.
According to Ramya Suryanarayanan, economist, DBS Bank, one needs to keep an eye on other data that come up as well and not just the IIP number. “By March-end, it is expected that the IIP may be around 4-5%.”  

Meanwhile, as many as nine out of 17 industry groups registered negative growth in November. Finance minister Pranab Mukherjee conceded in New Delhi that there would be an adverse impact on the economy if the IIP went down and inflation went up.

“However, I am not coming to any premature conclusion on this. If you have noticed, in November last year, it (IIP) was very high, so the base effect is also there, but that is no consolation. We shall have to look into the (reasons for) fall in IIP and take corrective measures so that IIP numbers improve in the remaining four months of the fiscal,” Mukherjee said.

Planning Commission deputy chairman Montek Singh Ahluwalia, however, chose to play down the impact of the drop saying there was month-on-month volatility in IIP data.

“I think we need to look at the whole scenario for this year. I would be delighted to see IIP growth of around 10% this year. If we get it in the range of 9.5-10%, then our target of achieving 8.5% GDP (growth) is quite possible. I think we are on track as far as GDP is concerned,” he said.

— With agency inputs