IIP paints a rosy picture, but was demonetisation really harmless?

Industrial production during the month grew by a startling 5.7 per cent over November 2015. Even for an optimist, this was beyond expectations. Most rating agencies were in fact expecting a de-growth.

Senior Assistant Editor Sumant Banerji
Late on Thursday evening, the office of the central statistician came out with its quick estimates of industrial production for the month of November 2016, and immediately set the cat amongst the pigeons.

It was the same month when the Indian economy witnessed a seminal event, demonetisation, which sucked out 86 per cent of the currency in circulation in one swoop. The impact of this on consumption in an economy largely reliant on cash was obvious, but you always need statistics to underline that.

To that extent, the IIP (Index of Industrial Production) data surprised everybody. The CSO said industrial production during the month grew by a startling 5.7 per cent over November 2015. Even for an optimist, this was beyond expectations. Most rating agencies were in fact expecting a de-growth.

Any impact of a slump in consumption to reflect in factory output takes time, and it can be fairly assumed that manufacturers would have taken a few weeks to assess the situation before applying the brakes. What also helped prop up the numbers was the low base effect of November 2015 that makes the current data rosier than it actually is.

"The positive IIP numbers in the month of November has come as a surprise, since the market players were expecting a negative growth number," CARE Ratings said. "Prima facie, it looks like the effect of demonetisation has been nullified by the huge negative base effect. However, this positive growth needs to be seen with caution, whether this growth is sustained in the coming months needs to be watched out for."

The IIP data follows a curious pattern in the last few weeks where official data has defied expectations and undermined the effect of demonetisation. Only on Monday, the figures for direct tax collection for December reflected a 12 per cent spike, while indirect tax collection grew by an even more impressive 25 per cent. "The tax collection numbers have to be taken in the right context.

It does look like the effect of demonetisation has not been factored in," says D.K. Srivastava, Chief Economic Advisor at EY India. "What we expect is a spike in direct tax collections post demonetisation and a decline in indirect tax revenues. The overall growth or decline in collections will be a balance of that. The 25 per cent growth in indirect tax collection is a surprise," he adds. The advance estimates of the GDP released on January 6 followed a similar pattern.

While the CSO revised the projection downward from 7.6 per cent to 7.1 per cent for fiscal 2017, it did not factor in the impact of demonetisation. In its own admission, it said there was a high degree of volatility in the numbers, indicating that GDP growth may actually be much lower.

"In the wake of demonetisation, even if the situation limps back to business as usual by the end of the fourth quarter, not all impacted sectors may rebound equally. Sectors hitherto dealing in high-value cash transactions, such as real estate (and related sectors like cement and other building products) and luxury automobiles may take longer to revive compared to others," says Crisil Research.

"We believe the advance GDP estimates of CSO are likely to have an upward bias especially in terms of government consumption growth (23.8 per cent) and government services growth (12.8 per cent). We had estimated India's GDP to grow at 6.9 per cent in fiscal 2017." This is not the first time that government data has come under a cloud. Exactly a year ago, the then RBI Governor Raghuram Rajan himself had questioned the accuracy of the GDP numbers.

"There are problems with the way we count GDP which is why we need to be careful sometimes just talking about growth," he had said then. "We have to be a little careful about how we count GDP because sometimes we get growth because of people moving into different areas. It is important that when they move into newer areas, they are doing something which is adding value. We do lose some, we gain some, and what is the net, let us be careful about how we count that."

For now, the numbers deflect some of the heat on the government post demonetisation that is believed to have caused much distress in the economy. Should they continue to paint a rosy picture in the subsequent months, it will set off a fresh round of scrutiny of the numbers. In the winter of 2016-17, the government's credibility is at stake.