Why an IIP contraction in November shouldn’t surprise anybody

Why an IIP contraction in November shouldn’t surprise anybody

Data shows every year since 2011, IIP has contracted either in October or November; variance depends on which month Diwali festival falls in that year

New Delhi: While a 3.2% contraction in factory output in November came as a disappointment, especially at a time when the Narendra Modi government is looking for cues of a sustained recovery of the economy, it is certainly not surprising.

Data analysed by Mint shows every year since 2011, the index of industrial production (IIP) has contracted either in October or November or both.

While in October 2011, IIP contracted 4.5%, in the same month in 2012, it shrank by 1%. In 2013, IIP contracted both in October (-1.2%) and in November (-1.3%). In 2014, IIP had shrunk 2.7% in October.

The variance in the month of contraction in factory output depends on which month Diwali festival falls in that year.

Pronab Sen, chairman, National Statistical Commission said since factories step up production going into the festive season, they usually have a large inventory in the festive month. “Thus, they either reduce their production or shut down the plant during the festive period for maintenance, leading to a contraction in factory output,” he added.

And every time after a dip, it invariably returns to the trend growth rate. For example, in 2014, after IIP contracted 2.7% in October, in November, it bounced back to 3.9% while IIP averaged 2.9% during April-September period. While 9.9% growth in IIP in October was certainly an aberration, the average growth during the seven months of the financial year is 4.4%.

However, it does not take away the high volatility that has been associated with the IIP data. When IIP plummeted to a 10-year low at 1.3% in August, 2008 against expectations, then finance minister P Chidambaram publicly questioned the data saying the data is not very reliable.

“The IIP numbers are not very satisfactory and at the same time they are not very reliable. I have conveyed my concerns a couple of months ago to the ministry of industry, I have conveyed them today,” Chidambaram had said. While the 1993-94 base year during that period was later revised to 2004-05, the volatility in the new series still continues.

The officials of the Central Statistics Office (CSO), the nodal agency for releasing IIP, have maintained that volatility is inherent to the IIP data due to the capital goods segment in the monthly data. Capital goods, which is a proxy for investment demand in the economy is inherently volatile due to bulky nature of its production.

The CSO is currently working on a new IIP series with base year 2011-12 which is expected to be more representative of the current production patterns in the economy and hopefully less volatile.


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