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| Base effect a riddle for economic indicators |
| Devika Banerji / New Delhi Oct 19, 2009, 01:36 IST |
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Analysts, economists plan to raise their IIP forecasts
Talk of a firm economic revival has gathered force after the industrial output growth in August touched the double-digit level, at 10.4 per cent. Most analysts and economists are planning to raise their forecast for the index of industrial production (IIP), expect better figures in the coming months and state that the projected growth rate should also be seen with an upward bias.
However, all the economic indicators like industrial activity as measured by IIP, headline inflation as measured by the wholesale price index (WPI) and gross domestic product (GDP) will post exaggerated figures in the coming months due to low figures recorded in the corresponding period in 2008, when the economic downturn began.
A low base will exaggerate figures in the current financial year, as the growth rates are calculated on a year-on-year basis. In the case of inflation, it was the high base effect that was coming into the play so far, with August 2, 2008, touching a peak of 12.91 per cent year on year. But the situation will change now since the WPI started falling as commodity prices crashed last year. In the case of IIP, it turned negative and touched the lowest point at -0.2 per cent in December 2008.
“Both the IIP and inflation numbers are essentially on the base effect of last year. We should be careful but should not overreact and go for contractionary policies. It is better to tolerate a little inflation, so as not to jeopardise growth,” Pronab Sen, chief statistician of India, said recently.
Sen had also stated that the repercussion of 2008 would stay for 3-4 years, after which indicators will stabilise from the effects of high inflation and then economic downturn.
Most analysts and economists feel this year’s economic data should be taken with a pinch of salt and expect the priority for the government should be to follow an accommodative monetary policy till the end of this financial year, as the economy is still weak. “Even as the numbers are high, the economy is still quite weak. Base effect will exaggerate all numbers, so some uncertainties will still prevail despite high numbers,” said D K Joshi, chief economist with research and ratings firm, Crisil.
The effect will be similar to what happened when the headline inflation rate plunged into the negative territory, indicating deflation. However, prices, especially that of food items, continued to rise. The high base of 2008 kept inflation at a low level; however, the high base effect will lose its steam by the end of this month, resulting in rapidly increasing inflation numbers.
“We will witness some amount of exaggeration in the growth figures and the magnitude of growth showed by indicators is a little misleading. However, things have indeed picked up. Comparing the indicators on a month on month basis, do point to recovery trends,” said Jyotinder Kaur, economist with HDFC Bank.
“Next month’s IIP might be a little lower than August’s figure, as late monsoons and floods might dampen the growth rate. However, the average for the year will be higher than what we had anticipated, despite uncertainties in the economic conditions,” said Subhada Rao, chief economist with Yes Bank.
Most feel the credit growth which has been constantly declining since April to stand at 14.09 per cent for the fortnight ended August 28 would be the decisive factor for the central bank to change its stance on monetary policy stance. They do not expect major changes in the upcoming monetary policy review by the RBI on October 27.
“I do not see any great changes in the monetary policy. However, some selective measures might be taken to mop up some liquidity from the system,” Rao said.
“Monetary policy will not have much change as the policy will factor in the base effect but we might see an increase in cash reserve ratio by January,” Kaur added.
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