Cant trust that IIP data

Written by Ila Patnaik | Updated: Feb 19 2011, 14:55pm hrs
The sharp drop in the growth rate of the IIP should be viewed with caution. The index rose by a mere 1.6% compared to December 2009. The sharp slowdown has raised questions about the need for fiscal and monetary consolidation. There are two issues to consider. First, that the data may not reflect actual production, given that the production basket has weights from 1993-94, which excludes some of the items that have a large share in production today. Second, the slowdown in IIP has come from a decline in capital goods production, which suggests that investment activity is down.

Table 1 shows how various components of IIP grew in December 2010, both in sectoral and use-based terms. It shows that capital goods were the worst hit and fell by more than 13%. This decline is a serious cause for concern in any economy since it gives an indication about investment plans in the economy.

Figure 1, however, shows that capital goods growth has been very volatile over the last two years. This has increased the volatility of IIP. There appear to be some issues of coverage. The first problem with the IIP data has been its coverage. The episode of very sharp growth in July 2010 brought this to attention. In July 2010, IIP growth was reported to be 15%. The output of machinery grew by 49%. Within machinery, the production of insulated wires and cables grew by 518%. This pulled up IIP sharply. Added to this was a 57% increase in the production of PVC pipes and tubes.

Similarly, in 2009-10, measured by IIP the growth in the machinery sector was 21%.

However, when we compare this number to the sales revenues of corporates in this sector from CMIEs Prowess database, we find that revenues grew by only 2.6%. This suggests a discrepancy. Data from CMIE suggests that in the machinery sector, companies that manufacture wind turbines and internal combustion engines took a big beating. These items are, however, not included in the IIP since IIP has an old base.

Similarly, IIP for rubber, plastic, petroleum and coal products reported a 15% rise in 2009-10. However, sales revenues from these companies declined by 2.5% during that year. The 15% rise was from PVC pipes, giant pipes and tubes and rubber tyres.

Table 2 shows where the growth in fell in capital goods. A sharp decline of more than 60% is seen in shipbuilding and repair. Similarly, the production of computer systems, cooling towers, agricultural implements, insulated cables and wires, dumpers, turbines, industrial machinery, furnaces, wagons, diamond and machine tools, electric generators, lifts and transformers actually declined. Textile machinery saw no increase in production compared to last year. A number of other equipment saw very low growth. If the above data is correct, it is very difficult to reconcile it with the growth in sales of companies in this sector.

The CSO proposes to bring out the new IIP with 2004-05 as the base year soon. This should be done with utmost urgency so that good data can guide policy decisions in these uncertain times.

The author is professor at NIPFP. Views are personal