Industrial production growth touched a 13-month high of 5.7% in November despite demonetisation, aided by a conducive base and fewer festival holidays compared with a year earlier due to the fact that Diwali fell on October 30 in 2016, showed the official data released on Thursday.
The IIP data for November was more sanguine than most analysts predicted. Economists surveyed by Reuters had forecast a 1.3% growth in output compared with a revised 1.8% year-on-year fall in October.
Analysts, however, said the spurt in industrial production in November doesn’t mean a turnaround yet, as the impact of demonetisation could be felt more in December than in November (the note ban was declared on November 8).
In fact, the IIP in November (175.8) was lower than October 2016 (178.1), suggesting industrial production actually dropped sequentially, as was mostly the case in earlier months as well. “Going by the production trend in some sectors such as auto, next month’s (December) IIP growth data may be more indicative of the impact of demonetisation,” Crisil Research wrote after Thursday’s data release.
Pronab Sen, former chairman of the National Statistical Commission tells FE, a note ban hits consumption first and the full impact on the supply side could come with a lag.
The impact of the cash crunch, however, got reflected more in retail inflation that hit 3.41% in December, the lowest since November 2014, as food inflation crashed to just 1.37% in December from 2.03% in November. This suggests the cash crunch during the kharif harvest might have prompted producers to sell cheap, resulting in lower prices of many items even at the retail level.
Although retail inflation averaging under 4% in the past three months, lower than the Reserve Bank of India’s (RBI) 5% target for March 2017, has created some room for the monetary policy panel to trim rates at the next meeting on February 8, some analysts say it may still choose to wait for the fiscal road map to be laid out in the Budget to loosen the policy rates. A rise in global commodity prices, led by oil (it has risen almost 18% since end-November), may also serve to dash the rate cut hopes in February as well.
Already, automobile sales recorded the worst monthly performance in 16 years in December. Also, the Nikkei purchasing managers’ index (PMI) survey showed manufacturing activity contracted for the first time in a year in December, while services contracted for a second straight month. November’s favourable base effect (the IIP had contracted 3.4% in November 2015) will also wane substantially in December.
Aditi Nayar, principal economist at Icra, said: “In most years, we caution against analysing data for October and November individually, as shifts in the festive calendar often distort factory dispatches.”
In 2016, the distortions would extend to December as well, with an early Diwali dampening output in October 2016, fewer holidays obscuring the impact of the note ban in November, and an expected adjustment in inventories likely to affect output growth in December, she said. Lead indicators for mining, manufacturing and electricity point to a loss of momentum in December, she added.
Sunil Kumar Sinha, principal economist, India Ratings & Research, said: “IIP grew 5.7% in November 2016 mainly due to the base effect. In fact the IIP in November 2016 (175.8) is lower than October 2016 (178.1) indicating that factory output has actually declined sequentially. According to use based classification the highest growth has been recorded by the capital goods sector but is again due to extremely low base. On the whole there is nothing to cheer about the November IIP growth as cumulative growth for April-November this fiscal at 0.4% is even lower than 3.8% recorded for the same period last fiscal.”
Although capital goods — a gauge for fixed corporate investment — expanded 15% in December after contracting for 12 months in a row, it was hugely aided by the base effect (The segment had contracted 24.4% in November 2015). Without the 15% surge in capital goods output, the IIP would have grown 4% in November, compared with 2% in the previous month.
Although consumer non-durables rose 2.9% in November, the highest since October 2015, the sector had witnessed marginal expansion in September after 10 straight months of contraction. This suggests rural demand continues to remain tepid. The consumer durables, however, rose 9.8% in November, compared with 0.2% in the previous month.
You may also like to watch this video
The fact that core inflation eased only marginally to 4.9% in December suggests demonetisation hit farmers harder than manufacturers in the non-food and non-fuel sector.