High-level panel suggests change in base year, calculation method

To present a more realistic picture of the economy, the Index of Industrial Production and Wholesale Price Index are to be re-cast.

The changes, based on the suggestions made by a high-level committee headed by Saumitra Chaudhuri, Member, Planning Commission and Prime Minister’s Economic Advisory Council, will include a shift in the base year and the product list for both the IIP and the WPI.

The IIP gives details of the growth of various industrial sectors such as mining, electricity and manufacturing. While the WPI is the price of a representative basket of wholesale goods and its changes are used as a key measure of inflation.

More realistic

“The effort is to make the two indices more realistic,” Chaudhuri told Business Line, adding that the entire exercise was aimed at making the indices reflect each other. The committee submitted its report on the IIP last week and on the WPI a couple of weeks ago.

On the WPI, the committee has suggested factoring in the price of manufactured goods without the excise duty component.

The panel has suggested a change in the base year of both WPI and IIP initially to 2009-10 and subsequently to 2011-12. The current base year for both the indices is 2004-05. The base year value is taken as 100 and the changes are calculated accordingly.

DK Pant of India Ratings justified the selection of 2009-10 as the new base year as it was a ‘normal year’, in which the economy grew 8.6 per cent. In a normal year, overall economic growth is better and there is no drought-like situation.

“The base year of price change and industry growth has to be revised more frequently, so that we measure the price and production movement with reference to the base year, which is closer to the present time,” he said.

Updating product mix

On the IIP, the committee has suggested updating the product mix annually to record changes in production trends. In a particular year, for instance, more basic mobile handsets could be manufactured, but the next year smartphones may takeover the assembly lines. So if the overall IIP is calculated with basic handsets in mind, it would not reflect the right picture.

One of the major changes suggested vis-à-vis WPI is doing away with the excise duty component in the price of manufactured products. Currently, WPI is calculated on the basis of price plus excise duty minus premium or discount. But, according to the recommendation, it will be price minus premium or discount.

Chaudhuri said the change in methodology will also help in using the WPI to deflate the value of output in the IIP, thus capturing the real rise in production.

Taking the price without the tax component is significant, as manufactured products have a weightage of 64.97 per cent in the WPI and 75.53 per cent in the IIP. This approach will help policy-makers and the Reserve Bank get a better fix on real improvements in the industrial sector.

The WPI also tracks prices in the wholesale market and determines the direction of interest rates. Both sets of data are released on a monthly basis. However, IIP data come with a one-month lag, while there is virtually no lag in the WPI numbers.

(This article was published on May 4, 2014)
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