Statistics can lead to wrong inferences if one were to ignore the context. The provisional factory output (IIP) data for November 2016 released on Thursday by the Indian government showed 5.7 percent growth on a year-on-year basis. The feel-good factor, so to speak, can be misleading. The case with consumer (retail) inflation for December 2016 dropping to 3.4 percent is equally prone to misinterpretation.
November was the first month of demonetisation, though not fully since the decision was announced on the eight of the month by Prime Minister Narendra Modi. When the IIP data is juxtaposed with that for the previous month, it is obvious that there has been a decline. The IIP general index read 175.8 for November, down from 178 in October.
The uptick in November was also attributed to a favourable base effect and Diwali festivities.
The trend for the eight month period deserves an even closer look. The cumulative growth during the April-November period in 2016 at 0.4 percent is far below from 3.9 percent in the corresponding period in 2015.
The outlook for the rest of the current financial year is not so bright, according to Radhika Rao, economist, group research, DBS Bank.
"Despite firm Nov IP we are not convinced this rebound will last. Along with still weak investment trends, other high-frequency signal slower momentum in Nov/ Dec16. This suggests that the already subdued phase of subdued production growth is likely to extend into Dec16/Jan17, not helped the least due to a build-up in inventories and weak demand due to the recent cash crunch," she said in her note on Friday.
Cash crunch triggers fall in inflation
The inflation data for December released simultaneously with IIP numbers on Thursday would prompt one to say that at a two-year low of 3.41 percent, it is now convincingly within the RBI's comfort zone of ~4 percent. However, a look at the underlying causes would reveal that the fall was triggered mainly due to a slowdown in purchases caused by the currency crunch than anything else. For instance, food price inflation stood at 1.37 percent, as purchases of many items were hit due to the inability of people to buy.
"Seasonal factors due to soft winter prices coupled with weak purchasing power due to the cash crunch weighed (vegetables -14% YoY, pulses -1.6%)," Rao wrote in her note.
Vegetables, being perishable in nature, aided the fall in overall inflation rate. "Inflation in vegetables, which accounts for ~6% in the CPI basket, declined 14.6% YoY (11.7% MoM) in December 2016, as against our expectation of a fall of ~13% YoY (10% MoM). Consequently, CPI inflation excluding vegetables was unchanged at 4.8% in the last two months," Motilal Oswal Securities Ltd. (MOSL) said in an update.
These are statistics that analysts prefer to call "false positives."
India is likely to end fiscal 2017 with an inflation rate of ~4.6 percent and then see a rise to 5.5 percent in 2017-18, MOSL added.
Scope for rate cut
The fall in inflation rate gives hope for a rate cut by the Reserve Bank of India when it meets next month. "Overall sequential trends signal that Jan inflation will remain around 3.2-3.5%, challenging the central bank's 5% target for Mar17. This leaves the door open for a rate cut, but is likely to be a close call between Feb or Apr policy meetings," Rao said in her note.
The next set of inflation and IIP data will be released after the presentation of Budget 2017 by finance minister Arun Jaitley on February 1, 2017.
