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How to correctly read the IIP numbers and the scary truth it reveals about Indian economy

The base effect will continue to impact economic data in the months to come. A worker holds a copper plate as he works on printed circuit board (Image for representation) (REUTERS)Premium
The base effect will continue to impact economic data in the months to come. A worker holds a copper plate as he works on printed circuit board (Image for representation) (REUTERS)

  • The base effect is at work here. The index contracted by 18.67% in March 2020 from a year earlier because of a nationwide lockdown, which brought industrial production to a standstill in many parts of the country last year

The Index of Industrial Production (IIP) for March was released on Tuesday. As can be seen from the chart that follows, the IIP grew by 22.35% from a year earlier. This is the fastest the country’s industrial output rose in the current series of the IIP, with 2011-12 as the base year for computing growth.

The IIP grew by 22.35% from a year earlier.
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The IIP grew by 22.35% from a year earlier.

The base effect is at work here. The index contracted by 18.67% in March 2020 from a year earlier because of a nationwide lockdown, which brought industrial production to a standstill in many parts of the country last year.

The base effect will continue to impact economic data in the months to come. Let’s take a look at this issue.

1) The sharp growth in IIP will continue at least till July-August. The IIP contracted every month from March through August 2020. The contraction in April and May last year was a massive 57.31% and 33.38%, respectively. Given this, the IIP growth for April 2021 and May 2021 will also be in double digits.

Other than the base effect, the lockdowns and curfews this year have not been anywhere as extensive as last year. Further, industries have also learnt from their experience and managed to continue production through the lockdowns. The disruption in the supply-chain network also not been as extensive as last year.

2) A similar base effect is likely for most economic data running up to July-August 2021. Let’s take the case of the gross domestic product (GDP). GDP is the measure of the economic size of a country. GDP stood at 26.97 trillion for the quarter ended 30 June 2020, a 24.4% contraction from a year earlier. The quarterly GDP has been growing since then and stood at 36.22 trillion for the three months ended 31 December, the latest data available.

If the GDP for the June quarter comes in at 32.38 trillion, we are looking at a growth of 20%. But that’s primarily because of the base effect. Yes, the economy is doing better than last year, but it hasn’t fully recovered from the impact of the pandemic.

3) In this scenario, the proper way of looking at things is to compare the 2021 economic data with 2019. This will tell us where the economy currently is, in comparison to where it was before the covid pandemic spread.

When it comes to the IIP in March 2021, it is 0.49% lower than where it was in March 2019. Hence, the IIP has just about managed to reach where it was two years back. Net-net, we are where we were two years back when it comes to industrial production.

From April 2021 onwards and over the next few months, the industrial production will be lower than that in March 2021, but it will be better than the figures we saw in 2020. This point needs to be kept in mind for IIP and all other economic data in the months to come.

A similar logic applies to the overall GDP number as well. To understand the real state of the economy, we need to look at the data from 2019. In the June quarter of 2019, the GDP stood at 35.67 trillion. For the economy to go back to where it was two years back, the GDP for the three months to 30 June 2021 should be greater than 35.67 trillion. The chances of that happening are highly unlikely, with the second wave of covid disrupting the economy. Nevertheless, the GDP for the June quarter will be higher than the 26.97 trillion reported in the previous year.

To conclude, it is vital to compare 2021 economic data with 2019 to get an idea of the real state of the Indian economy. On doing that, the realization will be that we are where we were two years back. And the situation might just get worse.

Vivek Kaul is the author of Bad Money.

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