It can only happen in India that, in this day and age, one of the most important indicators of the economy's good health or otherwise, namely the Index of Industrial Production (IIP), should be presented in the manner that it is. Even if one overlooks the other deficiencies in it, such as the relative weights of different industries, the failure to revise it often enough to make it more representative and, of course, the manner in which the data are collected and reported, how much sense does it make to compare what happened to industrial production in a particular month a year ago to what happens in the current year? Thus, the latest IIP says that compared to November 2009, industrial production in November 2010 grew by only 2.7 per cent. However, during April-November 2010, the index was up by almost 10 per cent. Which of these numbers is more important? This is not a trivial question, whatever the statisticians and econometric puritans may say, because the direction of both monetary policy and fiscal policy depends on it. If the November IIP alone is taken, the case for the RBI not raising interest rates becomes very strong; but if the whole year is taken into account, that case weakens somewhat. Likewise, for fiscal policy; depending on which number one looks at, the case for expansion or contraction becomes strong or weak. In short, there is a strong case to modify the way in which the IIP is presented. The barebones, no-explanations approach adopted by the Industry Ministry may have served a purpose at some point in time but today is pretty much useless for all practical purposes. Indeed, in way, it is like the answers to questions in the Lok Sabha, designed more to hide than reveal.
The dodginess of the IIP has been known for a long time. Several efforts have been made to fix the problem but entrenched powers in the Industry Ministry have refused to budge. And, since in the overall scheme of things in the Government, the IIP is a trivia, no concerted effort has been made. But the time has come to give up this lackadaisical approach. A useful starting point could be the recommendations of the Committee for Financial Sector Assessment, chaired jointly by the Finance Ministry and the RBI. The key recommendation was that the “the CSO should assume direct responsibility for the generation of the IIP. It should create the frame, select the sample and collect the data directly from the units.” The Committee had gone on to say that it should reduce its reliance on the administrative machinery and industry associations and “strengthen its own direct capabilities.”
There were other recommendations as well, all of which need to be considered in depth by the Government and acted upon quickly. Whether the Government has the energy at this stage to do so is another matter, however.