Sunday, September 28, 2014


The IIP July data has taken everyone by surprise. After a robust showing for the last 3 months, there was a dip in IIP index in the month of July. The IIP index fell to 0.5 percent as shown by the
official statistics. It should be noted that June month had shown a growth of 3.9 per cent. The data had been revised upward from 3.4 per cent stated earlier. The growth of the national economies is measured through gross domestic product, which measures performance in manufacturing sector, service sector and agricultural sector. To get a detailed view of how the economy performs one needs to have a bard’s eye view of these sectors which could be interpreted and analyzed through different sets of data. In India the performance of industrial sector is captured with the help of the industrial production index, referred to as IIP or Index of Industrial Production. It is a monthly data that measures the performance of the industrial economy. Hence, the data is used for gauging the growth of the economy in the short run. The base year used for the index is 2004-05. Though it has been changed numerous times in the past, there is a demand to change the base year to 2011-2012.
A fall in IIP numbers indicates that the industrial economy is facing a downturn. Industrial sector data is an important indicator of supply side growth in the economy. The fact that the industrial
sector data shows a meagre growth of 0.5 per cent points to the supply side bottlenecks. In other words, it means supply is not picking up as was expected in the given period.
Capital goods data indicates low investments 
Though July numbers were disappointing, some experts attribute it to the base effect. Notwithstanding, the fall in capital goods segment is really worrisome. The growth in the segment fell from 23 to -3.5 per cent . This figure indicates the total amount spent on buying machinery which augments production. Hence, this figure is indicative of the future expansion plans of the economy. It can thus be used to gauge sentiments of the economy - the direction in which it is moving and why. According to the RBI governor Dr. Raghuram Rajan, the growth of the economy, to a great extent, depends on investment growth. The capital goods figures are indicative of the investment growth. Hence, a fall in the numbers is indicative of the problems the Asia’s third largest economy is facing. The fact that the numbers are below the level in the base year does not help matters either. Hence, efforts are required to improve this number. Many a times high interest rates may dissuade companies from expanding business, which could also be a cause for the fall in July IIP numbers. Another reason could be postponement of investment by many companies, given that several banks are planning to take action against erring corporate borrowers. Given this gloomy scenario, there is a need for bringing in structural changes so as to improve the capital goods expenditure.
Core sector growth muted The core sectors are the most important constituent of the IIP number. They have a weight of 38 per cent in the total IIP index. This quarter the core sector has seen a fall from 7 to 2 per cent. The contraction in the size of its constituents led to the fall. The fall in the infrastructural index also does not augur well for the economy as the economic growth is impacted by infrastructural support provided by the eight industries which form the core sector. However, according to experts and analysts this low growth can be attributed to continuous increase in core sectors such as electricity and steel. It is believed that these sectors could see growth form hereon.
Consumer goods surprise
Consumer goods refer to the goods to be consumed by individuals. Hence, consumer goods
are an important demand side indicator. A fall in consumer goods by 7.4 per cent shows a negative sentiment during the given period. There seems to be fall in both supply and demand side which does not augur well for the economy. This is followed by a fall in consumer durables and non durables too.
Expected reaction by the RBI
RBI is expected to continue maintaining status quo (on interest rate front) and would not like to react to the given situation as these numbers seem to be out of synch with the bigger story. The
GDP numbers of the last quarter as well as the BOP position seems improved. Hence, reacting on these numbers would not make sense. Moreover, the reliability of IIP numbers is also debatable.
Therefore, it is advisable to wait and watch if there is any upward revision in the data.
Government policies and IIP number
It should be noted that the government at present has not made any structural changes in the economy. However, earnest attempts are being made to iron out bureaucratic inefficiencies in the system. These attempts would take time and hence it is not expected to yield results immediately. Having said that, structural changes are of paramount importance for the development of the economy and efforts should be made to increase the efficiency and efficacy of the
system by bringing more transparency in the system, making policies irreversible and homogenous across states. Also, as the IIP numbers show the short term sentiments, they cannot be used
to judge the long-term sustainability of the policies which have been introduced by the government. Hence this data should not be given too much of importance in terms of long-term growth.
Major challenges faced in improving IIP data
• Consumer Price Index continues its northward journey The wholesale price index is under control. However, price level for consumers keeps increasing persistently. This increase in price levels would stop the RBI from lowering interest rates which, in turn, would impact the investment climate in the country, thus muting future growth prospects as capital goods numbers
would decline.
• Volatility of IIP data 
The IIP data is highly volatile. It keeps on fluctuating regularly. This fluctuation in the value would tender the data unusable. The reliability of the data is also being questioned consistently. The revision of data adds to the woe of decision makers. Hence, it is imperative that steps should be taken to make the data more robust. The long standing demand of converting the base year to 2011- 2012 should also be implemented.
• Supply side bottlenecks
There are supply side and bottlenecks, which have hurt growth for long. To tackle them, the
government is needed to invest heavily.

Going forward, a lot is being expected from the BJP government  at the helm. They need to make sure that the investment increases in the long run. Development without structural changes is not
achievable and the government must go all out to bring in the same.

Note: This article expresses my view on IIP July data released in September published first in Global Analyst October edition.

No comments:

Post a Comment