Base Effect sends IIP soaring 134% in April

Subject : Economy

Context : The country’s industrial growth technically jumped 134 per cent year-on-year in April, mainly due to the base effect.

Concept :

According to National Statistical Office (NSO) data, the Index of Industrial Production surged to 126.6 in April 2021 from 54.0 in the same month last year, when the nationwide lockdown to curb the spread of Covid-19 had brought production to halt at most units.
The IIP had expanded 24.14 per cent in March 2021 to 145.5, also mainly on base effect.
To put the IIP number in perspective, in April 2019, it had grown 4.3 per cent over the same month the previous year.

Base Effect

The base effect refers to the impact of the rise in price level (i.e. last year’s inflation) in the previous year over the corresponding rise in price levels in the current year (i.e., current inflation)
If the price index had risen at a high rate in the corresponding period of the previous year leading to a high inflation rate, some of the potential rise is already factored in, therefore a similar absolute increase in the Price index in the current year will lead to a relatively lower inflation rates.
If inflation in June 2016 was 8% and absolute increase in Price index in June 2017 was say 9%, then, inflation in June 2017 will be low i.e. 1%
On the other hand, if the inflation rate was too low in the corresponding period of the previous year, even a relatively smaller rise in the Price Index will arithmetically give a high rate of current inflation.
If inflation in June 2016 was 1% and absolute increase in Price index in June 2017 was say 4%, then, inflation in June 2017 will be low i.e. 3%