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Wednesday, January 13, 2016

How bad is IIP growth after controlling for Diwali effects?

by Radhika Pandey and Pramod Sinha

Yesterday's data release showed a sharp contraction in industrial production in November. Some say that this contraction is an aberration as it was largely driven by seasonal fluctuations including the placement of Diwali and the number of working days in November.

A previous post on this blog How bad was industrial production in October? has highlighted the merits of using month-on-month seasonally adjusted numbers to provide timely and accurate information about the state of the economy. We apply our work on seasonal adjustment to analyse the true extent of contraction in the November IIP numbers. In the jargon of seasonal adjustment, Diwali is a `moving holiday': one that shows up in different months in different years.  A `Diwali effect' is found to be statistically significant for IIP and IIP (Manufacturing).

The figure above superposes the two time-series of seasonally adjusted annualised rates (SAARs). It has the SAAR IIP (without adjusting for Diwali) and SAAR IIP (with adjustment for Diwali). In most months, the two series are identical. But in some months, the interpretation of the IIP data strongly requires adjustment of Diwali as a moving holiday. The numbers for the month of November 2015 are worth noting. Without adjusting for Diwali effect, the month-on-month growth shows a sharp contraction of -71%, after adjusting for Diwali effect the month-on-month numbers modestly improve to -39%.

The figure above shows the same analysis for IIP (Manufacturing). If we look at the manufacturing sector, the seasonally adjusted month-on-month growth yields a negative growth of -44%. Adjusting for diwali effect results in modest improvement to -33%.

To conclude: After adjusting for the Diwali effect, IIP dropped by an annualised 39%, and IIP manufacturing dropped by an annualised 33%.

The authors are researchers at the National Institute for Public Finance and Policy.

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