Post demonetisation, new series puts IIP growth on even higher footing

IIP rose 2.7% in March as per new series, which revises base year to 2011/12 from 2004/05

Industrial output grew at a faster pace in the months after demonetisation, according to the new index of industrial production (IIP) series released by the Central Statistics Organisation (CSO) on Friday.

While the new IIP series isn't strictly comparable with the previous one, under the new series, industrial activity expanded by 2.6 per cent in December - the first full month since the note ban decision was announced on November 8th. By comparison, the industrial output had contracted by 0.1 per cent contraction under the old series.

IIP subsequently rose to 3.8 per cent in January under the new series, higher than 3.3 per cent recorded under the earlier series. While growth slipped to 1.9 per cent in February under the new series, it was still higher than 1.2 per cent contraction observed under the old series.

The higher growth during this period appears to have been driven by the mining sector which grew at 10.8 per cent in December as opposed to 5.5 per cent in the earlier series. It was aided by the manufacturing sector which reversed its contraction under the new series.

This higher growth of the mining sector is largely because of a change in the mineral conservation and development rules (MCDR) Amendment Rules, 2016, which has resulted in 27 non-metallic minerals being designated as minor minerals and which are no longer monitored by Indian Bureau of Mines.

Quarterly estimates of the new IIP series show that industrial output expanded by 4.4 per cent in Q3FY17, as compared to 6.6 per cent recorded in the second revised estimates of GDP released by the CSO. Growth under the old series was a mere 1.1 per cent.

A similar trend is observed in the previous quarters. Industrial activity had contracted in Q2FY17 under the old series. By comparison, it grew by 5.3 per cent under the new index and 5.1 per cent in the GDP data.

"The new IIP series indicates that volume growth in the industrial sector in the last five years has not been as anaemic as previously feared. Nevertheless, annual growth of manufacturing and mining remained sub 5.5% from FY13 to FY17. While mining and manufacturing recorded a meaningful improvement in growth in FY17 relative to FY16, volume expansion remained moderate. Electricity has remained the fastest growing sector since FY14," said Aditi Nayar, Principal Economist at ICRA.

But despite the new series showing higher growth in most months than the earlier series, the index continues to show that a revival in the investment cycle remains elusive. The capital goods segment, which connotes investment demand, grew by a mere 1.9 per cent in FY17, down from 2.1 per cent in FY16. This trend holds across the new GDP series as well as the old IIP series.

The silver lining being that the new segment - Infrastructure and construction goods - which comprises on paints, cement, cables, bricks and tiles, rail materials, and can be considered a proxy for infrastructure activity grew by 3.8 per cent in FY17, up from 2.8 per cent in FY16.