India‘s factory output grew 5.7 percent in November compared to -1.9 percent in October despite expectation of households putting off purchases and companies deferring investment hit by an economy-wide cash-crunch.
Contrary to popular opinion, the index of industrial production (IIP) witnessed a sharp upturn in November, the first month when the impact of demonetisation was to be felt. It rose by 5.7 percent owing to a base year effect.
However, considering the production trends in sectors like auto, the effects of demonetisation may become more apparent in December, says a Crisil report, adding that IIP data is false positive.
Factory output measured by the index of industrial production (IIP) is the closest approximation for measuring economic activity in the country’s business landscape.
The jump in IIP in November 2016 compared to (-)1.8 percent contraction in October a (-)3.4 percent fall in November 2015, could be primarily due to base effect—a statistical phenomenon that makes even tiny changes look large.
The string of holidays including Diwali in November last year where factories were shut could also partly explain fall in industrial output during the last year, making production growth look larger in 2016.
The opposition has been unsparing in its criticism about the government’s move to demonetize old Rs 500 and Rs 100 notes has forced many factories to cut down production, because of falling sales and low funds to pay wages in cash.
Many analysts have pointed out that companies, hit by poor sales, have cut back production and sitting on vast idle capacity. However, the latest IIP data does not appear to reflect impact of demonetization.
Latest data shows that capital goods output, a metric to gauge capacity additions by companies, have grown for the first time in the last few months. It grew 15 percent in November 2016 from a (-)24.4 percent contraction in November 2015, and a (-) 26.9 percent fall in October.
Consumer durables output growth moderated to 9.8 percent in November 2016 from 12.2 percent in the same month of the previous.
The currency withdrawal may partly explain the slower growth, given that TV and refrigerator sales usually peak during the festival and wedding months of October to March.
Consumer durables output and sales could slowdown even more in December following the scrapping of high denomination currency notes and the limit on daily and weekly cash withdrawals.
The ban has upset families’ spending plans on cars, televisions and refrigerators that peak during the wedding season.
The government has forecast that private final consumption expenditure (PFCE) during 2016-17 at constant 2011-12 prices—a scale to measure household spending—will be valued at Rs 67.13 lakh crore compared to last year’s Rs 63.01 lakh crore.
Consumer spending as measured by PFCE will likely grow 6.54 percent in 2016-17 over last year, compared to 7.4 percent growth in 2015-16, signs that households have deferred spending to deal with the currency culling exercise.
This delay in household spending has also likely pushed back investment growth with firms already sitting on vast unused capacities in consumption-linked sectors.
This will likely have a strong bearing on gross fixed capital formation (GFCF), a proxy for measuring investment activity.
According to advanced GDP estimates, GFCF, at constant 2011-12 prices, will likely fall (-) 0.2 percent in 2016-17 compared to a 3.9 percent expansion 2015-16.
The `manufacturing’ sector, which represents more than 75 percent of the index of industrial production (IIP), grew 5.5 percent in November from (-) 2.4 percent October and (-) 4.6 percent in November 2015.
Analysts cautioned against concluding that the IIP growth in November was an indicator of a broader industrial revival.
“On the whole there is nothing to cheer about the November IIP growth as cumulative growth for April-Nov this fiscal at 0.4 percent is even lower than 3.8 percent recorded for the same period last fiscal,” said Sunil Kumar Sinha, Principal Economist.
Mining production growth grew 3.9 percent during the month of November, compared to (-)0.7 percent fall in October and 1.7 percent growth in November 2015.