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  • 5 reasons to not worry about latest IIP, inflation data

    There are many things worrying the markets these days. Most of these are global factors – slowdown in China, poor global trade, drastic fall in the prices of oil and other commodities, etc. One factor is distinctly Indian – the slow rise in corporate profits. Until now, economic data helped calm investors – India’s economic growth seemed to be on the right track. Then came the latest data for Industrial Production (IIP) and Consumer Price Inflation (CPI)—productivity fell, while inflation picked up speed.

    However, there are many reasons why you should not worry about this data. Here are five:

  • Monthly data

    First of all, understand that both IIP and Inflation are measured on a monthly basis. This means it only takes into account the growth or rise in that single month. So, it is always best to look at the data over a longer term. One particular month could be an aberration. Unusual, one-time factors could have caused a larger-than-average growth/slowdown in that single month. And that’s what the recent data could be – an outlier.

  • Festive season in November

    Last year, Diwali fell in the month of October. This time, however, it was in November. During such festive occasions, there’s almost always a drop in productivity. For example, last year too IIP contracted during Diwali by 2.7%. That is the biggest reason for the negative growth in November. That could also be the reason for the higher-than-average growth in IIP in October 2015. So, data for these two months cannot be used to gauge the overall trend in factory output.

  • Chennai Floods

    There’s another big reason for the fall in factory output in November. “The slowdown in activity in November was accentuated due to the floods witnessed in Chennai, which is an important center for industrial activity in India,” according to the CRISIL report. Again, this is a one-off event. It cannot be used to signify a trend. So, it is best to take these two factors out of the picture to get an idea about the actual growth scenario. “Cumulative IIP this year continues to be higher in comparison to last fiscal (at 3.9% versus 2.5% last year) signalling the industrial output will inch up in the current fiscal,” CRISIL said.

  • Rise in inflation

    Slow growth plus high inflation is a recipe for disaster. This is why both the IIP and Inflation data are usually considered together. The latest data suggests retail prices grew at a faster rate of 5.6% in December compared to 5.4% in the previous month. “But the rise was much slower than in the previous months as the low base effect wore out,” credit ratings agency CRISIL said in a note. Moreover, the rise in inflation was mainly because of a jump in food inflation, mainly sugar, meat, fish and vegetables. Also, fuel prices too contributed to the inflation because of the hike in excise duty.

  • Inflation within target

    All said and done, what matters is whether inflation is getting out of hand. The RBI has a 6% target for inflation by January 2016. Currently, inflation may be rising, but it is still well within the target. “We expect CPI to average 5.4% in fiscal 2016. The RBI has set itself an inflation target of 6% by January 2016, which looks attainable,” CRISIL said. As long as this continues, there is no worry about a hike in interest rates. “We believe the RBI will keep policy rates unchanged for the rest of this fiscal unless inflation surprises on the downside,” the CRISIL report said.

    • The message in IIP numbers Read more

    • Growth data is not great, but the Budget can turn things around Read more

  • 24.4%

    The Capital Goods sector includes all kinds of machinery and assets used for production. This is why the growth in Capital Goods production is considered to be an indicator of investments. After all, companies only buy Capital Goods products when they are working on new projects, building new factories or expanding their businesses. A 24.4% contraction in the IIP data for the Capital Goods sector indicates that investments are yet to pick up in the country.