The Indian economy has witnessed a sharp increase in output and prices after the global recession. Month after month for nearly ten to twelve months now, there have been reports of high and rising growth rates of industrial production and prices. This has led to the belief that the Indian economy has been overheating. We now look at the latest monthly data to examine whether the trend of rising growth rates will continue in the coming months or will falter. Seasonally adjusted month- on-month data for both industrial production and prices suggest that growth and inflation are going to stabilise in the coming months.

Figure 1 shows the growth in the Index of Industrial Production (IIP). Seasonally adjusted data is sourced from the NIPFP-DEA programme that tracks macroeconomic data for the Indian economy and makes it available at http://www.mayin.org/ cycle.in/. The year-on-year growth, which is what is reported in media headlines, has been showing an upturn since the beginning of 2009. However, we need to remember that the year-on-year growth is the growth over the same month, twelve months ago. Thus, the year-on-year data misses out the trend of the latest few months. This can be captured by the month-on-month growth rate. But considering that this series suffer from seasonal fluctuations, it is important to first seasonally adjust them. The month-on-month rate is highly volatile and thus the growth rate series is smoothed by taking the three months moving average of the annualised rate. This rate is also shown in the figure. It shows that the acceleration that was seen in the first half of 2009, has now come down and there has been a slowdown in the last six months. This deceleration is going to get reflected in the year-on-year growth rate in the coming months.

Figure 2 shows the inflation rate based on the WPI. Again, while the year-on-year growth rate still continues to show a consistent increase, the latest data for the month-on-month seasonally adjusted inflation rate shows that prices have stabilised and the growth in prices has come down. This suggests that after a few months, if this downward movement in month-on-month prices continues, we will be witnessing a reduction in the headline inflation rate (the year- on-year growth in WPI).

In Figure 3 and 4 we look at elements of the WPI. Food has contributed the most to the rise in inflation in recent months. Figure 3 shows the rise in food prices. While the year-on-year growth?food prices today compared to those twelve months ago?continues to show high numbers of above fifteen per cent, the latest trends are more optimistic. Indeed, WPI food is now showing negative numbers?prices have fallen compared to last month. This decline will be reflected in the year-on-year food inflation rate in the coming months.

If we remove the most volatile elements of food and fuel from the wholesale price index, we get non-food, non-fuel WPI. Manufactured food products are also removed from WPI manufacturing. So products such as sugar are not included in this basket. This is the indicator that RBI has mentioned as rising and relevant to monetary policy recently. Again, the upward trend in the year-on-year growth rate is likely to go away with the month-on-month inflation rate coming down.

The above form the basis on which decisions about rate hikes and monetary tightening will be be made. If we were to merely watch the year-on- year growth rates we could come to erroneous conclusions that might suggest overheating in the economy. However, policy decisions are now influenced by better data and the focus in India has turned, as in the rest of the world, to understanding the latest trends by looking at month-on-month seasonally adjusted series. An encouraging recent development has been the inclusion of month-on-month seasonally adjusted inflation in RBI?s latest macroeconomic analysis. The figures suggest that in the coming months, the sharp increase in output and prices witnessed in the last quarter would be lowered.

?The author is senior fellow at the National Institute of Public Finance and Policy. Views are personal