The new Index of Industrial Production (IIP) series, with the base revised to 2011-12, tells us that, in the period December-March of 2016-17, manufacturing growth was the lowest compared with the same period in the past five years.
This is very likely a result of the hit taken by the sector on account of demonetisation. The new IIP data does not include the informal sector; so the slowdown shown by the chart is in the organized sector. The informal sector would have been hit much harder.
The chart shows the impact. The average rate of growth in the manufacturing sector in the 2011-12 series (year-on-year) during December 2016-March 2017 was 1.6%, compared with an average of 4.9% in December 2015-March 2016. The average rate of growth in the last four months of the fiscal year in 2014-15 was 3.2%; in 2013-14 it was 3.7% and in 2012-13 it was a very high 9.4%.
Why should we attribute the decline in manufacturing growth in recent months to demonetisation?
Because, if we take 2016-17 as a whole, manufacturing growth in terms of the new series was 4.9%, much higher than the growth of 3% in the previous fiscal. Which means growth in the first eight months of FY17 was much higher than in the corresponding period of FY16—the average year-on-year growth in the first eight months of FY17 was 6.6%, compared with 2.1% for the corresponding period of FY16.
That indicates it is the demonetisation episode in November that led to the fall in growth rate in the last four months of 2016-17. In other words, the growth momentum built up in the earlier months was derailed by demonetisation.
Has the formal manufacturing sector recovered from the ill-effects of demonetisation? The new IIP numbers do not show that yet—indeed, manufacturing growth slowed from 3% in January 2017 to 1.4% in February and further to 1.2% in March. The recovery from the shock of demonetisation has been slow.
That said, the growth in industrial production according to the new series is mostly higher than under the old numbers.
Apart from better capturing of changes in the economic structure, one reason is the new Wholesale Price Index (WPI), also with 2011-12 base, shows lower inflation than under the old WPI series. Since data for many items in IIP is captured in value terms, it has to be deflated by WPI. And if the deflator is lower, IIP will be higher. The impact will be all the more because under the new series, data will be captured in value terms for 109 items, as against 54 items under the old series.
Incidentally, some of the services components of gross domestic product, or GDP, are also deflated using WPI. With a lower WPI, real GDP, too, should be higher than under the old series.