Saturday, January 12, 2008

What has Diwali got to do with the IIP – Index of Industrial Production?

IIP represents roughly one fourth of the total value of goods and services produced in the country. This makes it an important indicator worth monitoring periodically.

Industrial production grew 5.3% in November 2007 from a year earlier; its slowest this fiscal. The cumulative growth for the first 8 months of the fiscal stood at 9.2%.

Explaining that it is just a statistical blip rather than a reflection of any tangible slowdown in the economy, economists have come with the ‘Diwali effect’ theory.

They attribute the lower figure to a cut back in production in the festival month after aggressively building up inventory in the previous months to meet the demand, apart from a high base in November, 2006 when industrial output has risen 15.8%. During the festival month manufacturing plants are closed for a while.

Last year Diwali fell in October and so did the growth rate of the IIP to 4.5%. But the index rose sharply (15.8%) in the post festival month of November last year, setting up a spike from which to measure growth this November. The current fiscal saw Diwali being celebrated in November.

The high base effect associated with the falling of Diwali in one month last year and another this year, is being referred to as the Diwali effect.