Why November 2016 IIP does not reflect demonetisation impact?

Changes in production lag consumption trends

by Mahesh Vyas

A lot of economic data for November 2016 indicated that demonetisation did not have a seriously adverse impact on the economy. The Index of Industrial Production (IIP) grew by a handsome 5.7 per cent y-o-y - much better than its performance in any of the preceding 12 months. Its growth is well spread over mining, manufacturing and electricity. More importantly, consumer goods (both durables and non-durables) grew well during the month. There are the usual data problems such as the sudden and handsomely positive growth in capital goods - it grew 15 per cent y-o-y in November after having recorded a double-digit decline in the preceding 12 months. But, overall the message from the IIP data is that the industrial sector was not hit too badly by demonetisation in November.

There are several other data releases that indicate that the economy was performing quite well during November.

Revenue earning freight traffic on the railways grew by 5.5 per cent, in line with the IIP’s growth. Trade growth was healthy too. Exports grew 2.2 per cent and imports grew 9.5 per cent. Correspondingly, cargo handled at major ports grew at 10.2 per cent. Consumption of petroleum products grew 12.1 per cent.

Tourist arrivals grew 9.2 per cent and domestic passenger air traffic grew 22 per cent.

Unemployment was low at 5.7 per cent compared to 6.3 per cent in October.

Almost all the data releases for November 2016 seem to suggest that the economy was not impacted by demonetisation. But, such an inference is confounded by the claims of consumer goods companies that business is down as also reports of businesses being disrupted following demonetisation. How do we reconcile these two starkly opposing views of the economy? We believe that both views can hold true.

The loss of business reported by retail trade and consumer goods companies is in consumption or offtake. This does not show up in production losses in November. While automobile sales fell in November, production increased. The fall in consumption initially leads to inventory pile-up, then cancellation of orders and then a cut in production lines. Individual companies are loathe to cut back production and risk loss of market shares or report fall in sales unless it becomes necessary to do so. There are also legal, operational and logistics reasons that would slow down the process of a production cut.

There are other reasons why production cuts would not have been immediate. Old currency notes continued to remain legal tender for railways, petrol pumps, electricity utilities and payments to government. This partly explains the increase in consumption of petroleum products and possibly also freight earning railway traffic.

The full impact of the shock of demonetisation and its effect on consumption would be felt on production during December 2016 and then in the following months as well. The first sign of this shock is seen in the production of automobiles, which fell 21.8 per cent in December.

Different industries have different lags with respect to final consumption expenditure, in their production schedule. Fast moving consumer goods and consumer durables companies will be the fastest bring their production lines down, intermediate industries such as steel and cement would take longer and utilities such as electricity would take much longer depending upon the extent of the downturn.

We may thus expect data such as the IIP to show the impact of demonetisation with some lag.

CMIE STATISTICS
Unemployment Rate
Per cent
4.3 -0.1
Consumer Sentiments Index
Base September-December 2015
92.4 0.0
Consumer Expectations Index
Base September-December 2015
94.8 0.0
Current Economic Conditions Index
Base September-December 2015
88.7 0.0
Quarterly CapeEx Aggregates
(Rs.trillion) Mar 16 Jun 16 Sep 16 Dec 16
New projects 3.31 1.54 2.34 1.41
Completed projects 2.27 0.90 2.17 0.85
Stalled projects 1.04 1.32 0.39 0.79
Revived projects 0.62 0.43 0.51 0.17
Implementation stalled projects 0.92 0.50 0.58 0.80
Updated on: 28 Mar 2017 8:20PM
Quarterly Financials of Listed Companies
(% change) Mar 16 Jun 16 Sep 16 Dec 16
All listed Companies
 Income -0.2 -0.9 2.1 6.3
 Expenses 0.8 -0.3 1.9 6.7
 Net profit -29.7 -4.1 14.6 36.2
 PAT margin (%) 4.9 6.9 6.9 6.0
 Count of Cos. 4,452 4,409 4,366 4,313
Non-financial Companies
 Income -2.2 -2.5 0.6 6.1
 Expenses -4.0 -2.9 -0.2 7.6
 Net profit 3.9 9.6 26.6 20.3
 PAT margin (%) 6.1 7.4 6.9 6.1
 Net fixed assets 3.8 -9.2
 Current assets 3.0 8.1
 Current liabilities 10.6 11.6
 Borrowings 6.7 3.1
 Reserves & surplus 7.8 8.4
 Count of Cos. 3,485 3,456 3,424 3,394
Numbers are net of P&E
Updated on: 28 Mar 2017 8:28PM
Annual Financials of All Companies
(% change) FY13 FY14 FY15 FY16
All Companies
 Income 11.9 9.4 4.7 0.6
 Expenses 12.1 9.3 4.7 0.8
 Net profit 1.1 -4.2 3.4 -13.0
 PAT margin (%) 3.6 3.2 3.3 3.2
 Assets 14.1 12.3 9.0 7.9
 Net worth 9.5 9.5 8.3 6.4
 RONW (%) 6.8 6.0 6.2 5.5
 Count of Cos. 23,431 20,686 19,475 15,131
Non-financial Companies
 Income 11.1 9.0 3.7 -0.6
 Expenses 11.4 8.7 3.8 -1.4
 Net profit -8.7 -5.6 -2.2 12.8
 PAT margin (%) 2.4 2.1 2.2 2.9
 Net fixed assets 12.8 11.3 12.4 11.0
 Net worth 7.8 8.4 6.8 5.4
 RONW (%) 5.5 4.8 4.9 5.9
 Debt / Equity (times) 1.1 1.1 1.1 1.0
 Interest cover (times) 2.0 1.9 1.9 2.1
 Net working capital cycle (days) 71 69 68 69
 Count of Cos. 18,019 16,227 15,305 12,140
Numbers are net of P&E
Updated on: 20 Mar 2017 1:24PM

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