The Index of Industrial Production (IIP), a critical economic indicator, has of late become a source of concern — sometimes unmerited — over the credibility of India’s statistics. The bellwether high-frequency indicator is a key input into making and assessing policies, particularly those pertaining to the manufacturing sector, inflation, interest rates and the flow of credit in the economy. But, in the past few years, the month-on-month IIP has shown excessively low, and even negative growth, which subsequently turned out to be out of sync with the actual manufacturing output growth measured through the Annual Survey of Industries (ASI). The survey for a financial year comes with a lag of about 24 months.
The theoretical aim of the IIP is to capture the direction and the trend of industrial production in the country, not the absolute value of industrial production. Its chief utility is as an early indicator of turning points in the economy. The IIP has been failing in serving this purpose. The reason being that it was measuring industrial output using baskets of production items and producing entities that had remained unchanged since 2004-05. The standard procedure followed was that a list of items was constructed in the base year and for each item the producing entities were identified. This structure was frozen. The index was constructed with the output figures received month over month from the baskets of items and entities fixed in the base year. If an entity shut down, its output fell to zero. But since the basket was frozen no new entity could be taken in place of the zero-output one. Over time, an item, say calculators, may fall out of use and more smartphones may be consumed. The IIP was not equipped to capture such changes in the economy.
A more dynamic index
Naturally, the IIP growth acquired a certain directional bias, which impaired its usefulness. To overcome the weaknesses, the IIP is being made more dynamic. First, the Central Statistics Office has updated its base year to 2011-12. The revision, the ninth such exercise since the original base year choice of 1937, is aimed at capturing the changes that have taken place in the industrial sector since 2004-05. New products have been included in the items basket, and those that have lost their relevance deleted. Renewable energy, for example, has been included in the electricity index. The expanded coverage — 809 items against 620 earlier, and a larger number of factories — is expected to make the IIP more representative.
Second, instead of the periodic baskets revisions, a permanent standing arrangement is being put in place to make sure that the IIP remains representative. An ongoing process is to be instituted for monitoring and mapping into the index the changes taking place in the economy under which a technical committee will continuously review the item basket, the reporting entities and the method of coverage.
The improvements in the statistical apparatus have been carried out on the recommendations of a committee that the United Progressive Alliance (UPA) government had constituted in 2012 under the chairmanship of late Saumitra Chaudhuri, a member of the Economic Advisory Council of Prime Minister Manmohan Singh. Several measuring difficulties remain, though. The process of physically collecting data from entities to establish the collection system, where no statutorily-mandated system of regularly reporting production is in place, is still an institutional challenge.
Righting the numbers
The updated IIP offers new insights, the most important being that India may have been overstating the industrial slowdown in its economy. Whereas the average industrial output growth of the last five years (2011-12 to 2016-17) in the old IIP is 1.38%, in the updated series it is 3.8%. On the manufacturing front, the news gets even better. The average five-year growth has improved to 4.04% against 0.94% in the old IIP. Although the average growth in two of the five years in which UPA-2 was in office outpaced that in the three years of the incumbent National Democratic Alliance (NDA) government’s tenure. The performance — 4.2% versus 3.9% — challenges the narrative of the ‘policy paralysis’ characterising the dying years of Dr. Singh’s stint. It also tests the efficacy so far of Prime Minister Narendra Modi’s ‘Make in India’ initiative.
The bad news is that the output growth of the infrastructure and construction sector has slowed down from 5.7% in 2013-14 to 3.8% in 2016-17 despite the NDA government’s sustained push to the infrastructure sector, including through substantial increases in targeted public spending, in the last three years. The updated IIP also shows a modest recovery in the capital goods sector, a barometer of the investment sentiment. From -3.6% in 2013-14, output growth in the sector improved to 1.9% in 2016-17.
The main driver of growth in the economy remains consumption. Consumer durables grew 6.2% and non-durables 9% in 2016-17. The Seventh Pay Commission award to Central government employees and pensioners last year seems to have spurred consumption. The monthly figures have not been released, but the spurt could also have been triggered by hectic use of demonetised cash for acquiring consumer durables and non-durables.
Demonetisation’s debilitating impact on manufacturing is visible in the updated monthly IIP for 2016-17. The average output growth for the seven months from April to October was 6.8%, and for the five months from November to March 2.28%. The IIP’s coverage by design is limited to the organised sector. The disruption in the unorganised sector is expected to get measured in the ASI.
The base years of all the major macroeconomic indicators, the Gross Domestic Product (GDP) and the Wholesale Price Index, are now aligned — 2011-12. The revised IIP will be plugged into the GDP series. The revised GDP estimates are scheduled to be released on May 31.
