Policy

Updated IIP series seen giving factory growth a boost

Surabhi New Delhi | Updated on January 11, 2018 Published on May 09, 2017

PRONAB SEN, Country Director for the IGC’s India Central Programme

Analysts hope new WPI measure will bridge gap with retail inflation

Factory output, as measured by the index of industrial production (IIP), could see more buoyant growth of at least two percentage points under the new and updated series that will be launched on May 12.

This is because the new series of IIP with a base year of 2011-12 will include an updated item basket that mirrors the actual consumption and supply patterns such as more processed foods – noodles – and SIM cards, chemicals, as well as electronic and computer products.

“The current series has a base year of 2004-05 and it has completely missed out on the high growth phase. Further, many products that are now relevant are either missing or under-weight,” said Pronab Sen, Country Director for the IGC’s India Central Programme, and former Chairman of the National Statistical Commission.

The issue was also raised by the working group for the development of the methodology of compilation of IIP, which was led by former Planning Commission member Saumitra Chaudhuri which had noted that “due to phasing out of items in the Item Basket, growth rates from IIP are lower”.

Instead, while selecting the item basket in the new base year, special emphasis may be given to items that are growing in importance in the revised base year, compared to the previous years.

The panel had recommended a new item basket for the IIP including 55 mining products, 809 manufacturing products that should be re-grouped into 521 item groups and treating electricity as a single product.

However, analysts are uncertain on whether the new IIP series will reduce the volatility in the index and ease the divergence with manufacturing performance in the GDP data.

“The current sample size of capital goods is very small and the methodology is such that it leads to a lot of volatility,” said DK Srivastava, Chief Policy Advisor, EY.

The expert committee had suggested that the ‘value of operating work in progress’ should be collected to avoid spikes in reporting of these items and reduce volatility and use average values for missing data sets.

The new IIP series, which has been pending for nearly three years, is being keenly awaited for by analysts and experts who have pointed to its huge difference with GDP estimates.

“The existing IIP series being quite dated, it does not capture production in new facilities, either in traditional sectors or in more modern sectors. This is one of the reasons leading to the gap between the volume-based IIP based on the 2004-05 series and the manufacturing GVA data from the updated 2011-12 base,” noted Aditi Nayar, Principal Economist, ICRA.

Industrial production as measured by the IIP grew by 0.4 per cent between April 2016 and February 2017. But in contrast, gross value added in the manufacturing sector is estimated to have risen by a buoyant 7.7 per cent.

Updated WPI series

On May 12, the government will also be launching an updated series of the wholesale price index (WPI) based inflation with a base year of 2011-12, but whether it would bridge the differences with retail inflation is not very clear.

The new WPI series is also expected to have an updated item basket and weightage.

“The new series will be directionally the same as the old series but inflation rates may change as commodity baskets will change,” said Sen.

While WPI inflation is no longer targeted by the Reserve Bank of India for monetary policy, the series has come under question after the revision of the consumer price index in 2015.

The new CPI series with a base year of 2012 and has 11 and 17 new items in the rural and urban consumption basket respectively.

Hoping that the updated WPI index is more in line with the CPI index, NR Bhanumurthy, Professor at NIPFP said, “The IIP and WPI have created a lot of confusion on macro-economic data and are also very dated. We should have all macro indices at one base year.”

With this exercise, all key macro economic data indices — national accounts, IIP, WPI and CPI will have a common base year of 2011-12, making comparisons easier and the data more relevant.

Published on May 09, 2017
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