High base effect likely to pull down December IIP

The index dipped for the first time this financial year in Oct.

The Index of Industrial Production (IIP) is likely to dip for the second time this financial year as uptick in certain sectors, as reflected in data for the core sector, will not be able to match the impact of the high “base effect”. IIP data for December will be released on Thursday.

The factory output index has to grow 6.55 per cent on a month-on-month basis for the December IIP numbers to be in the positive territory. It grew by 2.38 per cent in November 2008, after a 0.34 per cent fall in October.

“The index number stood at 284.7 in December 2007. We expect the number to be 271 in December 2008. This means the IIP may dip by 4 per cent,” said Soumendra Dash, chief economist, CARE Ratings.

The IIP had dipped for the first time (by 0.34 per cent) in this financial year in October. This was the time when India started feeling the full brunt of the global economic slowdown.

Saugata Bhattacharya, vice-president, Axis Bank, expects the IIP to dip by 1.7 per cent during the month. “This is an optimistic number. The base effect is too high and growth in production is muted,” he said.

Apart from the high base effect, economists point at two factors that are likely to drag the IIP down — the waning domestic demand for manufactured goods and dipping exports — both of which led to less production by factories. Exports had dipped 1.1 per cent in December 2008.

However, Shubhada Rao, chief economist of YES Bank, expects the IIP to expand 0.8 per cent on the back of growth in some segments of the index of core infrastructure industries as well as marginal growth in production of capital and intermediate goods. “The core sector data showed healthy production levels in cement and coal,” she added.

The index of six core industries, which constitute 26.7 per cent of the IIP, had expanded 2.3 per cent in December.