India’s factory output, measured by the Index of Industrial Production (IIP), has seen a swing from negative to positive, registering 5.7% growth in November 2016 as against 1.9% in October 2016. The pace of expansion has come as a surprise, as growth was widely expected to be affected by demonetisation and is much higher than the figure some economists were working with. The key to the high percentage jump is this: just over a year ago, the index plunged dramatically in November 2015, the result of post-Diwali blues, which explains the very positive base effect. The best way to strip away the base effect, therefore, is to consider the fall in the index from the previous month, or October 2016, to reflect the impact of demonetisation.
Even if we do that, we find that the manufacturing index has fallen a mere 1.3% from October. A slew of factors is responsible for this resilience. Capital goods production, for instance, has moved up sharply in November compared to the previous month. Orders for these goods had been received months ago and demonetisation couldn’t have affected them. Some economists are reluctant to read too much into the figures because the turnaround has been led by rubber insulated cables—a volatile component. Meanwhile, as anticipated, demonetisation has hit consumer durables growth, but non-durables have done well.
There are expectations that the actual impact of demonetisation on factory output would be known once December IIP figures are announced. It is worth noting that December 2015 saw a huge rise in IIP and therefore, there will be a strong negative base effect in December 2016.