How bad was industrial production in October?

by Radhika Pandey and Rudrani Bhattacharya.



This appeared in Financial Express today.



In India, many people look at year-on-year changes to track the state of the economy. This indicator has important weaknesses. It is the moving average of the change seen in the latest twelve months and is hence a sluggish indicator of the changes in the economy. In order to monitor current developments in the economy, it is preferable to look at month-on-month changes.



However, month on month changes are distorted by seasonal fluctuation. The solution lies in seasonal adjustment. The seasonally adjusted month on month changes provide more timely information about the state of the economy. Internationally, the standard procedure for examining and monitoring economic series uses seasonal adjustment.

The figure shows the familiar time-series of year-on-year growth of IIP. This shows that output in October 2009 was 10.3% bigger than the level of October 2008. This seems reassuring.



Far more informative is the time-series of month-on-month changes. Each of these values is the annualised month-on-month change in the seasonally adjusted IIP. The term applied is `SAAR change' which stands for the Seasonally Adjusted Annualised Rate of change. This shows an unhappy value of -5.12% for October 2009 (when compared with September 2009). The key strength of this approach is that we are discussing the change from September 2009 to October 2009, instead of the 12 changes from October 2008 till October 2009.



Is the picture so dismal? To answer this, we need to look into the non-economic factors which might influence this number. October 2009 was a month of festivities with fewer working day but enhanced purchases prior to Diwali. At the same time, Diwali does not occur in a fixed month every year. Hence, the simplest seasonal adjustment procedures will not remove these effects.



In the jargon of seasonal adjustment, Diwali is a `moving holiday'. It requires special care in seasonal adjustment. Hence, in our work on seasonal adjustment, we test for the impact of moving holidays such as Diwali and Id, and when these effects are statistically significant, we adjust for them. Through this procedure, we find that SAAR for IIP for October 2009 works out to +0.12%. In other words, correcting for Diwali yields a change from an estimate of -5.12% SAAR for October 2009 to an estimate of +0.12% SAAR.

The figure superposes the two time-series of SAAR IIP (without adjusting for Diwali) and SAAR IIP (with adjustment for Diwali). In most months, the two series are obviously identical. But in some months, the interpretation of the IIP data strongly requires care in treatment of Diwali as a moving holiday.



Many analysts warned about reading too much into the weak October 2009 IIP performance, on the grounds of a Diwali effect. We go from this broad but unspecific caution to a precise estimate of what happened to overall IIP and IIP-consumer goods in October 2009 when compared with September 2009, after adjusting for seasonality and Diwali. The result is a gloomy value of 0.12% SAAR for IIP in October 2009.

The biggest impact is visible on the IIP-consumer goods (figure above) which shows a pleasant value of 7.01% SAAR after the Diwali adjustment, while without this adjustment, there is a worrisome SAAR value of -25.07%.



The calculations reported here are updated every Monday at http://www.mayin.org/cycle.in on the world wide web. For all series, Diwali effect testing is done, and wherever the impact is statistically significant, it is adjusted for. It proves to be significant for IIP, IIP (Manufacturing) and IIP (Consumer goods).

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The trading hours controversy

Shifting away from central planning

 

Traditionally, Indian socialism has involved government control of all aspects of financial products or processes. As an example, government specified the time of day at which trading starts and the time of day where it stops. The RBI committee process on currency futures and interest rate futures specified that trading must start at 9 AM and stop at 5 PM.



In most areas of the Indian economy, goverment no longer controls the economy in such fashion. The government does not specify what time a shop opens or closes. There was a time when the Indian government did not permit the use of aluminium for making cans of soft drinks. A large fraction of such meddling in the economy has been dismantled (though not in finance).



A few weeks ago, SEBI came out with a liberalised policy: Exchanges could open anytime afer 9 AM and stop trading anytime before 5 PM. If NSE or BSE opt for longer hours, securities firms will face the decision about the time at which the shop opens for business and the time at which it closes. Staying open longer will involve somewhat higher costs and in return will yield somewhat higher revenues. Each shop will make its own decision about choosing a starting and a closing time.

 

What do we gain?

 

If Indian markets to be open from 9 AM to 9 PM, there are two benefits. First, consumers should have maximal choice on when they can achieve their trading needs. Recall that internationally, many grocery stores choose to stay open for 24 hours a day.



Second, in the late evening in India, the ADR market opens in the US, and it is important to link up the closing Indian prices to the opening US prices.

 

How will exchanges and their members cope?

 

If securities firms have to stay open for 12 hours a day, this will require process modification, including multiple shifts for certain employees.



These changes might seem burdensome. But similar changes have taken place before. With floor trading at the BSE, trading only lasted for two hours a day; but when NSE came along, trading moved up to 5.5 hours a day. Members doing commodity trading are already running to almost midnight.



Securities firms and exchanges will need to change their process design to achieve longer hours. If a securities firm has to trade from 9 to 9, this will require two shifts. The first shift will probably come to work at 8 AM, and stay till 3 PM, while a second shift will probably come to work at 3 PM and stay till 10 PM. Some firms will find that this does not make sense for them and they will choose to only keep their shop open for shorter hours.



The operation of securities markets in India is held back by infirmities of the payment system. A shift to longer trading hours will encounter frictions owing to problems with payments.



At first, clumsy solutions will be found because of problems of the payments system. But at the same time, when the industry demands more from the payments system, we set ourselves on the course for deeper surgery of the payments system. In this 21st century, we can and should have a payments system which processes 100,000 messages per second and runs for 24 hours a day. When the industry complains enough about the infirmities of what is in place, the existing payments system will be questioned, which could ultimately lead to improvements in the payments infrastructure.

 

A messy situation?

NSE and BSE have gone through a series of announcements. First, BSE said they would start at 9:45. Then NSE said they would start at 9 AM. Then both said they would think about this after the holidays.



These activities seem messy and confusing in the public eye. These tactical details are an inherent part of the market economy. When government control is withdrawn, and a license-permit raj is scaled down, we go from a tranquil and stable environment -- the silence of a graveyard -- to a dynamic environment where firms are thinking and reacting. This should be welcome.

 

Doing more on moving away from central planning

 

SEBI needs to move forward on many fronts in terms of getting away from government control of product features. There is no reason to restrict exchanges to the zone from 9 to 5. Similarly, many other product features on the derivatives market need to be decontrolled: what underlyings to use, whether cash settlement or physical settlement, the expiry dates, the contract sizes, etc. Government control of these product features is as legitimate as government control over the design of a bicycle.



There is a difference between regulation and control. The role of government is to specify pollution standards for cars and to require seat belts or airbags. It is not to design cars.

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An upsurge in inflation?

There is a lot of concern about inflation. Most of it is based on perusing the following numbers of the year-on-year changes in price indexes:

	Jul	Aug	Sep	Oct
CPI (IW)	11.9	11.7	11.6	11.5
WPI	-0.7	-0.2	0.5	1.3
WPI Food	13.3	14.0	15.7	13.4
WPI fruits,vegs	15.5	12.0	24.6	11.1

True inflation in India is somewhere between the CPI-IW (which overstates the importance of food) and the WPI (which overstates the importance of tradeables and thus the exchange rate). YOY CPI changes are stubbornly above 10\%, and the yoy WPI inflation seems to have risen in each of the above three changes.



However, the year-on-year growth is the summation of the changes of the last 12 months. To get a sense of what is going on in the recent period, and to not be confused by ancient information, it is essential to look at month-on-month changes. This requires seasonal adjustment.



At http://www.mayin.org/cycle.in, we have a program of regular release of this data, which includes month-on-month changes expressed as `seasonally adjusted annualised rates' (SAAR). This shows:

	Jul	Aug	Sep	Oct
CPI (IW)	40.8	10.2	10.8	8.1
WPI	9.7	10.6	5.7	4.5
WPI Food	52.8	14.7	7.7	13.4
WPI fruits,vegs	39.6	-23.7	-3.6	33.2

This shows a rather different picture. We have food inflation, particularly with fruits and vegetables, given that we've just had a bad monsoon. But the overall WPI Food inflation contained one big jump in July and has slowed down after that.



The CPI(IW) gives a lot of weight to food. Hence, it showed a big value in July. After that, it has reported softer values.



The WPI itself was showing values around 10% in July and August, but gave values near 5% in September and October.



This, then, seems to be a relatively benign inflationary environment to me, particularly from the viewpoint of monetary policy. Monetary policy should not take interest in food prices in connection with a monsoon failure, because the time horizon over which monetary policy acts is long - perhaps between 9 and 18 months. By this time, conditions in WPI Food will have been reshaped by many new harvests.

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Difficult times in Andhra Pradesh

Andhra Pradesh was once seen as a state with good governance by Indian standards. In recent years, the problems seen with Satyam, attempts to harass Nimesh Kampani, etc. have led many to question the quality of governance in Andhra Pradesh. Today, John Elliott has an important article in the Financial Times on the difficulties of Andhra Pradesh.

I took a look at the CMIE data on investment projects outstanding to measure the share in the investment projects at hand in India. I found that the action was strongest in state-wise data for projects which were `Announced' (and not `under implementation'). The two states with the biggest decline in the share in India were West Bengal and Andhra Pradesh:

	Andhra Pradesh	West Bengal
Jun '08	7.46	8.00
Sep '08	6.43	7.31
Dec '08	7.15	8.19
Mar '09	6.20	6.48
Jun '09	6.29	5.71
Sep '09	5.43	5.56

For Andhra Pradesh, the decline over this period was 2.03 percentage points and for West Bengal, the decline was 2.44 percentage points. These are the two biggest declines across all the states in this period.

All these values are a far cry from the biggest share of Andhra Pradesh ever seen -- which was 18.53% in December 2001, when Chandrababu Naidu was chief minister. For a comparison, the peak share seen for West Bengal was 8.25%, which was in March 2008, when the CPI(M) was still a part of the UPA; we can vividly see the decline from that point to 5.56% in the latest data. The full time-series for all states are here.

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Getting to a liberal trade regime

I wrote two columns on trade liberalisation in Financial Express:

• Where did the Bombay Club go wrong?


• Trade liberalisation: Looking beyond the WTO

Also see:

• Protectionism by India, as seen at Global Trade Alert.


• The Unrelenting Pressure of Protectionism: The Global Trade Alert's Third Report by Simon J. Evenett, on voxEU yesterday.


• Praveen Kumar Singh has an article in Indian Express, via yahoo about an egregious piece of protectionism that's proposed by the Indian government: banning foreign shipping companies from carrying intra-India traffic.


• Jean-Pierre Chauffour on voxEU.


• Charu Sudan Kasturi in the Telegraph on fears of heads of universities in India.


• Ashok
  Desai in Business World, which led me on to href="http://rspas.anu.edu.au/papers/asarc/WP2007_07.pdf">Manufacturing
  protection in India since independence by Garry Pursell, Nalin
  Kishor and Kanupriya Gupta.
  

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Consequences of exposure to violence

Marginal Revolution pointed me to a paper by Edward Miguel, Sebastian Saiegh, and Shanker Satyanath (of UCB, UCSD, NYU) titled Civil war exposure and violence. Their key result is: Football players from countries which have experienced civil wars are more violent on the field (after controlling for a host of things). This supports the idea that exposure to violence coarsens human sensibilities.



The authors mention the World Values Survey, and I dug out a small table out of this about responses to the proposition: Using violence for political goals is not justified. Here is what we see for 1995:

	India	Russia
Strongly agree	59.6%	44.2%
Agree	19.3%	37.3%

I picked Russia because they have suffered terrible violence through the combination of World War II and Communism. We see a difference in "Strongly agree" but not much of a difference in "do not agree" (i.e. the residual category).



I have often wondered about these issues in the context of India's story. In the period after the fall of the Mughal empire, many parts of India experienced extreme violence. But the last big war that was fought in India was 1858. After this, there have only been wars at the border; these wars have not brought violence and barbarism to civilians. We were incredibly lucky to have been the lab for Gandhiji's revolutionary idea, of political change without violence. So we have had 151 years without war. But the roots of India's sustained peace today lie not just in Gandhiji and the nature of the freedom movement, but deeper in history to the peace that has reigned from 1858 onwards. If anything, the puzzle in India is about how badly law and order has fared, given such benign initial conditions.



Going by the argument of Miguel et al, this sustained peace would have helped shift mores towards reduced violence. I feel that when peace is established, and for many generations the incentives guide young men towards participating in the market economy, this exerts a civilising force.



The great bursts of violence that we have had have been like Partition (1947), Delhi (1984), Punjab (1984-1990) and Gujarat (2002). (I'm curious: What other big episodes would you classify alongside these?) Each of these would scar an entire generation near that location. Time heals, but the clock takes 25 years after one such episode of large-scale violence. Part of what has worked better for South India is that there has been less violence there all the way from 1858 onwards.



This perspective tells us something about places like Iraq or Afghanistan or Pakistan. It is not enough to bring about peace; what is of critical importance is to have sustained decades under conditions of peace. This would yield the incidence of non-violent behaviour and trust capital which might help in graduating to the double helix of capitalism and freedom.

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Interesting readings

• T. N. Ninan in Business Standard on the decline of Bombay. I think of the establishment of ISB in Hyderabad as an important lost opportunity, and a prominent contribution of the Shiv Sena to India's backwardness. ISB near Hyderabad is an impressive achievement, but it's a shadow of what it would be if it were on the outskirts of Bombay.


• G. N. Bajpai, Mr. Bhave's predecessor's predecessor, argues in favour of legislation that defines the role of HLCC and makes it more effective. (This was an opinion piece in the Economic Times).


• Replace EPFO with NPS by Dhirendra Kumar.


• Writing in Financial Express, Ramkishen Rajan worries about the analytical foundations of the supposed hierarchy of desirability of various types of capital flows.


• Viral Acharya in Financial Express.


• In India, the phrase `industrial policy' is considered acceptable in polite company, while in the international discourse, people get embarassed when they propose it. Michael Boskin has a column on the return of industrial policy from its grave.


• Roger Bate, writing in The American is skeptical about the possibilities for the Indian drugs industry.


• A 1000 word precis summarising what we know about economic development, by Daren Acemoglu. Also see this piece by Lisa Chauvet and Paul Collier on voxEU.


• A paean to Timothy Geithner, by David Brooks, in the New York Times.


• The open source approach to maps: See this and this. You might like to see my blog post and FE article on the subject of map databases in India.


• David Edmonds has a great story about Levon Aronian, the man who aspires to unseat Vishwanathan Anand from the world #1 slot, and the remarkable place of chess in Armenia.

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