November’s 3.2% industrial output slump, the biggest contraction since October 2011 isn’t reflective of a downtrend in Asia’s third biggest economy and shouldn’t invite panic given the highly volatile nature of the monthly IIP data and one-off factors such as the Chennai floods . Moreover, the data masks the fact that consumer demand, a key growth driver is holding up well, cushioning the manufacturing sector from the effects of a global slowdown.
Decoding the IIP data: the truth behind the numbers
- Unfavourable Base effect- a higher base in November 2014 when industrial growth spiked 5.2%, acted against the corresponding number for 2015.
- Seasonal woes– the devastating floods that hit Chennai, affecting industrial activity while lower working days which led to lower production due to a shift in the festive calendar, also played spoilsport.
- Consumer demand showing resilience-consumer durables output rose 12.5% in November, a sign that domestic consumption, a harbinger of India’s growth, is going strong.
- Long-term manufacturing trend shows improvement– the manufacturing sector which shrank 4.4% on the year in November 2015, grew 3.9% in April-November 2015-16, up from 1.5% in the same period a year ago, signalling a pickup in the sector’s fortunes.
IIP is poised for a rebound
- Corporate spending may pick up: waning impact of Chennai flooding and possibility of key reforms for the manufacturing sector in the upcoming Budget may boost business investment.
- Upbeat domestic consumption to support manufacturing: pay hikes and possible tax incentives in the Budget to buoy consumer spending.
- Reform push-looming GST implementation maybe a game-changer for the manufacturing sector while increased government spend on infra will boost industrial activity.