I do have my doubts about the magnitude of March ‘12 IIP drop of 3.5% . However, a deeper analysis of IIP numbers show is that the economy continues to expand at a slow and steady pace, and the dip in IIP is driven by a combination of base effect and possible data error.
The IIP dip of 3.5% for March seems to have caught many folks by surprise. The first reaction from many economists and analysts is that it is another data error.
However, a quick analysis suggests that the IIP number seem to be directionally correct, even though I have serious doubts over the magnitude.
For instance, the fall in IIP numbers tie in with what the PMI and sentiment indices are indicating.
HSBC Manufacturing PMI’s has been showing a YoY fall of more than 5% for the period between March and April 12 and BlueFin’s spending sentiment Index for April 12 still remain in the pessimistic zone. Though month on month the sentiment shows an uptrend, my guess is that on a YoY basis, it’s also likely to show a contraction (YoY change data is not available, hence the guess).
Now here’s a twist: month on month IIP as well as PMI numbers show an expansion while it’s the YoY numbers for March ‘12 that shows a contraction. And this contraction is due to a sharp spike in IIP of a year back, during March’11, which could very well be an uncorrected data error.
So, what does that mean? All that it means is that the economy continues to expand at a slow and steady pace, and as of now there is no need to get too bothered by the contraction in IIP.