New factory index may push up GDP

Researchers, policymakers and other stakeholders found the old IIP series (base 2004-05) volatile and inconsistent owing to wide fluctuations, sharp revisions and unexpected/sudden trend reversals. The link between this series and the gross value added in the manufacturing sector has been weak and often unbelievable.

The Central Statistical Office (CSO), ministry of statistics and programme implementation (MoPSI), has revised the base year for IIP from 2004-05 to 2011-12 in order to achieve twin objectives: (a) to reflect changes in the industrial sector, and (b) to align it with the base year of other macroeconomic indicators such as GDP, WPI, etc.

The distinguishing features of the new IIP series include, inter alia , the following. First, the selection of items has been done at the 3-digit level of National Industrial Classification (NIC) 2008 as against selection at 2-digit level made in the earlier series.

Second, the weight of electricity has gone up considerably, from 6.99 per cent to 10.32 per cent, to reflect the inclusion of renewable sources of energy, while the weights of other two major groups have been reduced modestly.

Third, the use-based classification has been reframed by replacing ‘Basic Goods’ with ‘Primary Goods’ and introducing a new category called ‘Infrastructure/Construction Goods’.

Fourth, data for capital goods in the new series will now be captured in terms of ‘work-in-progress’ in order to avoid reporting of production figures in bulk after the production is completed. In view of these improvements in the compilation procedure and change in the base year, the new series is expected to be relatively more consistent, reliable and less noisy.

Data for the overlapping period from April 2012 to March 2017 are currently available according to both new and old bases.

These two sets of data are not strictly comparable for obvious reasons. (a) The indices for the base year 2011-12 have been normalised to 100 at monthly level; (b) The item baskets are different with the inclusion of new items and exclusion of old ones; (c) The electricity sector now captures data on renewable energy sources; (d) The coverage of the mining sector has undergone a change; and (e) The number of factories in the panel of reporting data has been increased.

Nevertheless, the new series for the overlapping period looks less volatile and consistent. This could be attributed partly to the recording of capital goods production as ‘work-in-progress’ and the inclusion of new items such as renewable sources of energy, whose output may be less seasonal.

Moreover, growth rates in the new IIP series have been generally higher than in the old one. Annual growth rates of the new IIP indicate that industrial production in India grew consistently at a higher rate than those reported earlier according to the old series ( see table ). A similar pattern is also visible at the sectoral level.

There is obvious curiosity to know why the new IIP series is showing consistently higher growth over the old one since 2012-13. Out of 407 item groups (including mining and electricity) in the new series, 258 item groups are common, with the existing basket having a weight of approximately 84.6 per cent. The number of new items, with a weight of approximately 15.4 per cent in the new IIP series, is unlikely to influence IIP growth to such an extent. A deeper understanding is needed to dispel the doubt as the state of the industrial sector in India has been lacklustre in the recent period.

Some data included in the IIP series are collected in value terms. These data are deflated by WPI to remove the price effect.

In the new IIP series, data for 109 item groups are being collected in value terms as compared to 54 item groups in the old series. Earlier, these data were deflated by the old WPI series (base 2004-05). Now the new WPI series is available with 2011-12 as the base year. WPI inflation according to the new series is consistently lower compared to the same according to the old series. As the deflator is much lower now, the IIP data collected in value terms would show higher volume in real terms. Other contributing factors could be fresh items included in the new IIP, particularly renewable sources of energy.

This has obvious implications for the revision of GDP estimates. Earlier, the old WPI series was used as a deflator to estimate real GDP in several sectors. As mentioned, the new WPI series has already pushed up industrial production. In most of the services sector, the new WPI series will also be applied to arrive at real GDP since 2012-13. In view of this, India’s real GDP data are expected to be revised upward going forward.

In most of the developed countries, GDP is estimated through double deflation — deflating input and output by their own indices rather than by using a single index. India and China continue to estimate their GDP through single deflation. The real GDP may be overestimated under single deflation, if input prices have been rising at a lower rate than the output prices, and vice versa. Therefore, the System of National Accounts (SNA) 2008 — a standard compilation manual of IMF — has suggested the use of double deflation to estimate real GDP.

GDP data according to the new series is already under severe attack. Further upward revision in real GDP may intensify the debate regarding their accuracy. The controversy relating to GDP estimation in India may be partly resolved if the CSO adopts the double deflation method for estimating India’s real GDP consistent with international best practices.

The writer was former principal adviser and head of the monetary policy department, RBI