There is protruding disconnect between the November IIP figures and a host of high frequency indicators.

A sharp jump in the November factory output numbers comes as a pleasant positive surprise for the economy amid slowdown stories in the aftermath of demonetisation. The index of Industrial Production (IIP) rose to a 13-month high of 5.7 percent in November compared with a contraction of 1.8 percent in the month of October.

However, it is too early for the pro-demonetisation camp to uncork the bubbly because of two major reasons:

One, this sudden jump is mainly on account of the so-called base effect. On a weaker base in the corresponding period of last year, the figures in the current year will show a sharper-than-actual jump, although the absolute increase would be less. In this case, the IIP in November last year was negative 3.4 per cent. “So excluding base effect, IIP growth would be around –4.6 percent in November 16,” said Soumya Kanti Ghosh, Chief Economic Adviser, SBI in a research report.

Two, the November figures typically reflect the festive season demand. Other indicators for November and December months, such as PMI, bank credit growth and two wheeler sales, points towards slower economic activity. Hence, they do not support a sharp rise in IIP shown in November, particularly with respect to revival in capital goods and manufacturing output. One needs to wait for December/ January numbers to get a clear trend on industrial pickup.

On account of these reasons, economists aren’t too bullish on the November IIP numbers despite a 5.5 percent increase in manufacturing output, a 15 percent jump in capital goods and a 5.6 percent jump in consumer goods. Radhika Rao, economist at Singapore-based DBS also points out to some abnormal jump in certain segments such as 185 percent rise in cable, rubber insulated component having distorting effects on the IIP numbers.

“Consumer durables output moderated on sequential terms due to the cash crunch. Despite firm November IIP we are not convinced this rebound will last. Along with still weak investment trends, other high-frequency signal slower momentum in Nov/ Dec16. This suggests that the already subdued phase of subdued production growth is likely to extend into Dec16/Jan17, not helped the least due to a build-up in inventories and weak demand due to the recent cash crunch,” Rao said.

Rating agency Crisil, a subsidiary of global rater Standard and Poor’s, too cited weak macroeconomic indicators to take a cautious position on improvement in economic activities. “Going by the production trend in some sectors such as auto, next month’s IIP growth data may be more indicative of the impact of demonetisation,” a statement from the agency said.

Another rating agency, Care, cautioned that even the December IIP numbers would have a statistical benefit distorting the actual growth figures. “While one would have to wait and watch for December to be certain of the neutral impact of demonetization, negative growth in IIP in December and January of FY16 would provide a similar statistical benefit for industrial growth,” Care said.

“We still believe that it would be premature to conclude that demonetization did not have an impact as the data on physical production numbers for auto and infra sectors do show lower production numbers for November when compared with October, but are getting magnified when compared over 2016,” the agency added.

For the 8-month period, growth was marginally up at 0.4 percent, Care said. “If positive rates accrues in next two months due to the statistical bias, then the final number for the year could be in the range of 1-2 percent," Care said. “Growth in capital goods does not gel with the CSO release last week which talks of a sharp decline in capital formation for the full year. Also with credit growth being tardy, it is more likely that the growth was more statistical in nature,” the agency said.

There is protruding disconnect between the November IIP figures and a host of high frequency indicators. The November core sector growth numbers were at 4.9 percent as compared with 6.6 percent increase in October and 5.01 percent in September, while the decline in PMI to 49.6 in December as against 52.3 in November--the slowest recorded growth in the manufacturing sector seen in this year—and the fall in bank credit. The RBI data on bank credit shows that growth in non-food credit growth in December has slowed to the slowest in at least 19 years. That apart, most two-wheeler makers have reported a drop in the sales post-demonetisation. These numbers tell us that there is a slowdown in growth at least in the short-term.

The bottomline is this: Despite what the November IIP numbers tend to portray, the outlook on economy remains grim for this year, at least going by the hard evidence on the ground. One needs to wait for more data and be cautious while looking at the monthly numbers, at least for the next few months, to get a clearer trend of the movement in the economy.

(Data support from Kishor Kadam)