Sep 14, 2013 06:07 PM IST | Source:

Freak July IIP data: Why we should not jump with joy yet

The spike in the IIP is a freak because just one element-electrical machinery and equipment, with a weight of under 2 percent in the index-spiked by a whopping 83 percent.

R Jagannathan

Before you pop the champagne, here are some sobering thoughts on the July spike in the Index of Industrial Production (IIP) by 2.6 percent and the marginal fall in the consumer price index (CPI) for August to 9.52 percent. Both are highly misleading. Here's why.

One, the spike in the IIP is a freak because just one element-electrical machinery and equipment, with a weight of under 2 percent in the index-spiked by a whopping 83 percent. One does not know if all the buyers of electrical machinery banded together to buy so much stuff in one month, but this 83 percent rise made all the difference to the 2.6 percent rise in the IIP.

As a Business Standard report points out, while the IIP rose by 4.4 points to from 167.1 in July 2012 to 171.5 in July 2013, electrical goods contributed alone to 5.17 points to the index's rise. "Without this unusual boost, manufacturing and hence the IIP for the month would have contracted, rather than surprising us on the upside," the report notes.

Another unusual spike is in wearing apparel (weight in IIP, 27.82 percent, even more than electrical goods)-which rose 44 percent in July. Once again, this unusual jump-are people suddenly splurging on clothes? - is unexplained, though the spurt in stock clearance sales in July and August by many retailers ahead of the festive season could be a partial explanation.

This does not mean an industrial turnaround is not underway, but just that we have to wait for further confirmation in the coming months before we start celebrating a recovery, or even worse, explaining it as the Raghuram Rajan effect. Rajan wasn't around in July or August.

For the record, overall IIP growth in April-July was -0.2 percent-exactly the same as in April-July 2012. Industry is essentially stagnating even now. Exclude the 15.6 percent rise in capital goods production in July, thanks largely to electrical goods, and we would have had negative growth.

Two, the consumption story is skewed. While consumer durables (fridges, washing machines, etc) are down 9.3 percent, consumer non-durables (toothpaste, soaps, daily necessities) are up 6.8 percent in July. This is indicative of a continuing loss in consumer confidence. When you are uncertain about the future, you don't scrimp on soap and food (you can't), but you do put off that purchase of the LCD television set to a later date.

Three, the fall in retail inflation-CPI is down from 9.64 percent in July to 9.52 percent in August-is more apparent than real. And here the situation is the reverse: essentials are costing more.

Food inflation is still in double digits at 11.06 percent, with cereals (weight of nearly 15 percent in the CPI) leading the charge with a rise of more than 14 percent. Veggies (26.48 percent up), eggs, fish and meat (up 13.65 percent) are driving food inflation, even though pulses, oils, milk fruits and other food elements are below the overall food inflation rate.

With the Food Security Bill set to drive more demand for food procurement, it is only the good monsoon that will keep cereal inflation from hitting the roof. For most of the last five years, food inflation has been in double-digits, indicating that there is a structural problem in supplies-especially in protein foods.

Four, when it comes to prices, the worst may be yet to come. The big hike in diesel prices-where oil companies are losing more than Rs 10 a litre-is yet to come. When that happens, one should expect another strong cost-push to inflation.

Five, the rupee's recent gains do not yet mean that companies will be impacted less by imported inflation. The rupee is still at 64-and a lot of imported ingredients and products will cost more due to this. A whole range of consumer electronic imports-from TVs to smartphones -will see a price spike, and so will everyday things, due the cost of imported ingredients going into them. Hindustan Unilever, for example, is increasing prices of soaps and toothpaste by upto 13 percent, reports Mint.

If both consumer durables and non-durables are going to become expensive, it is highly unlikely that consumer inflation is going to moderate anytime soon. And remember, a good monsoon means more rural demand for precisely these items-which is good from an IIP perspective, but also means pricing power will return.

Nobody can predict how the mix of so many factors-rupee fall, import compression, export spike, and agriculture growth-will impact growth, inflation and interest rates.

We can be hopeful, but should continue to keep our fingers crossed. One month's IIP is not enough; one swallow does not make a summer's day.

The writer is editor-in-chief, digital and publishing, Network18 Group

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