Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial

Dissecting the -4.2% IIP Drop in October: Big One Time and Diwali Impact, But it's Still Bad


Diving deeply into the Index of Industrial Production (IIP) in October 2014, and the large drop gives us a few insights.

  • The biggest negative contributor to IIP was “communications equipment” which is amplified due to a base effect. Its contribution to IIP will be more muted next month.
  • Even if you disregard that bit, IIP growth was negative. First time in seven months!
  • The Diwali effect being in different months in the last two years means our October Data is off base.
  • November data will therefore look good anyhow.
  • Even after all this, the data is the worst since April 2014

That Big Fat Contributor

How did we get the -4.26% number on IIP we saw in October 2014?

Looking at the numbers and taking the internal numbers of the components of manufacturing (which forms 75% of the weight of the IIP) we can see the buildup:


The biggest drop was in “Communication Equipment”.  This seems to have been explained by the shutdown of the Nokia factory in October. I know like two people who own Nokia phones and I don’t think they are so relevant anymore, or that their shut down quite explains the exemplary drop, of 70% year on year on that sub-item.



This drop is largely due to a base effect (October 2013 was a huge spike up) and more because this sub-index has been falling hugely anyhow :


Next month, it won’t look so bad.

The data seems weird. The index piece contains things like colour TV sets, mobile phones, capacitors, transistors etc. This is stuff we largely import whole. But companies like Micromax do make mobiles (though they might import parts and just put their label on it) which should count as manufacturing, but it doesn’t seem to have been added in this index at all.

IIP Still Negative, Even if you Minus Comm Equipment

Remember this, though. Even if you remove the communications equipment piece completely, IIP was still negative. Communication Equipment contributed -4.06%, but IIP fell -4.26%, which means the rest of the items put together contributed -0.2%.

This could be a worry, especially because we seem to have large drops in Chemicals, Machinery and Vehicles.

This is the first negative IIP growth since April 2014.

The Diwali Impact

Every Diwali, production in India drops. Diwali is sometimes in November and sometimes in October. When it is in October, the drops are slightly more pronounced, because Dussehra and Diwali fall in the same month. (When Diwali is in November, Dussehra is in October). This might be because factories need to be shut or that workers take leave.


This time, Diwali was in October. Last year, Diwali was in November.  That means year on year growth will look awkward – we are comparing a Diwali October (2014) with a non-Diwali October (2013).

If this is correct, November will look like a spike up, and we will need to factor this Diwali effect in as well.

Conclusion: Bad, but not so Bad

Let’s get this straight. Diwali effect, yes. Comm Equipment base effect, yes.

Even with that, we are at ZERO or slightly negative growth even from last November (a comparison that accounts for the Diwali effect).

So it is bad, but the -4% number is overstated.

But bad is bad, and this is the first lousy number since April. The winds are turning, even if it’s only a gentle breeze in the other direction.


Subscribe to Capital Mind:

To subscribe to new posts by email, once a day, delivered to your Inbox:

[wysija_form id=”1″]


Also, do check out Capital Mind Premium, where we provide high
quality analysis on macro, fixed income and stocks. Also see our
portfolio which has given stellar returns in our year, trade by trade
as we progress. Take a 30-day trial:

[wysija_form id=”2″]


Like our content? Join Capitalmind Premium.

  • Equity, fixed income, macro and personal finance research
  • Model equity and fixed-income portfolios
  • Exclusive apps, tutorials, and member community
Subscribe Now Or start with a free-trial