Fall in factory output, as shown by official data released last week, appears statistical rather than real. According to Quick Estimates of Index of Industrial Production for November, industrial output registered a negative growth of 3.2 percent for the month, but it is now clearly evident that we should not read too much into it. A closer look into the data shows that industrial recovery is still making moderate but steady progress. Retail inflation data, released on the same day, raises some concern, but again it is not something to worry about unduly. If reforms are pursued consistently, the ongoing recovery is unlikely to be derailed.
The November industrial data looks disappointing when we place it against the much higher growth figure of 9.9 percent in the month of October, but the cumulative April-November 2015 growth stands at 3.9 percent, compared with the 2.5 percent growth in April-November 2014-15. Similarly, manufacturing, which contracted 4.4 percent in November, grew at 3.9 percent in April-November period of FY16, against 1.5 percent growth in the year-ago period. Even when we average the growth numbers for October and November (2016), it gives 3.4 percent y-o-y growth, which, despite being lower than average 3.9 percent April-November growth, does not seem like spelling doom.
Spike in October IIP was due to spurt in demand in consumer products and capital goods during the festive season. It was also amplified by the base effect as October 2014 was a bad month. In addition, as pointed out by the Chief Economic Advisor recently, lesser number of working days in November and floods in Chennai through the month impacted the factory output numbers. Similarly, the rise in retail inflation in December is a concern, but it was mainly due to high food prices, driven by delays in the sowing of the rabbi crop and a hostile weather. Also, inflation is still below the central bank's target of six percent.
It's very encouraging to see that the Government has continued its reform efforts. Last week, the "Start-Up India" initiative was launched. I think several measures introduced — including three-year income tax holiday, exemption from capital gains levies on VC investments, exemption from inspections for three years, self-certification and cut in patent application fee, etc. — will help improve the start-up ecosystem in the country. In addition, the recently cleared crop damage insurance scheme will provide a much-needed relief to the farm sector, which has been hit by two consecutive droughts. These are welcome moves.
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