1. WPI, IIP series: Narendra Modi government may depart from the past, drop excise duty component from manufactured goods

WPI, IIP series: Narendra Modi government may depart from the past, drop excise duty component from manufactured goods

In a departure from the past, the government is planning to remove the excise duty component from the manufactured goods while calculating wholesale price inflation for this critical segment under the new WPI series with 2011-12 base year, sources said on Thursday.

By: | New Delhi | Published: May 12, 2017 6:59 AM
The move to remove the excise duty component from the manufactured items, with an almost 65% weight in the WPI.

In a departure from the past, the government is planning to remove the excise duty component from the manufactured goods while calculating wholesale price inflation for this critical segment under the new WPI series with 2011-12 base year, sources said on Thursday.

Analysts said the government’s plan to also change the base year for the Index of Industrial Production (IIP) series to 2011-12 from 2004-05 will help capture the country’s factory output better and could lead to significant upward revision in growth figures for the sector in recent years. However, it won’t end the notorious fluctuation in certain IIP segments, particularly capital goods, because volatility is linked to the production pattern. The government will anounnce new series data for both the IIP and WPI on Friday.

Similarly, while the new WPI series, replacing the 2004-05 series, will reflect more adequately the changing consumption pattern in the economy and better capture the price pressure at the producer/wholesale level, it may not necessarily narrow its huge divergence with the consumer price index-based inflation witnessed in recent years, partly due to the huge difference in the composition of the two price gauges, said the analysts. The WPI has inched up at a much slower pace than the CPI in recent years, with the difference being as high as 5 percentage points in the beginning of 2016-17.

The move to remove the excise duty component from the manufactured items, with an almost 65% weight in the WPI, is being done because of the fact that the WPI is also used as a part of the deflator to calculate the real growth of gross value added (GVA) in the economy. Since the GVA doesn’t factor in indirect taxes, removing the excise duty component from the WPI in manufactured goods is only natural.

However, since the base year for some of the crucial indicators of the economy—GDP, IIP, CPI and WPI—are going to be the same, the comparisons among these gauges would be better, they added.  Also, replacing the old basket of goods with a contemporary one will lend more credibility to the growth data of such indicators. The change in the IIP base year is usually undertaken to reflect the changes in the structure and composition of the industry over time because of consumption pattern, technological changes and economic reforms. Such a change in the WPI base year is also done periodically to make the item basket a proper representative of the price pressure at the wholesale level in the country.

The working group for the development of the methodology of compilation of IIP had recommended that the new item basket for IIP include 55 mining products and 809 manufacturing products, with electricity as a single product.
“Volatility in IIP is mainly due to the capital goods segment; it is linked to the real life problem and isn’t a statistical problem. So the change in the base year won’t erase such volatility,” Pronab Sen, former chairman of National Statistical Commission, told FE.

Aditi Nayar, principal economist at ICRA, said the composition of the IIP may see greater changes than the WPI when the new series data are announced. Also, while an upward revision in the IIP for earlier months is likely under the new series, it still may not bridge the huge divergence with the impressive growth in GVA in the manufacturing sector in recent quarters. This, also, is mainly due to the fact that the IIP is only a volume indicator, while the GVA captures value addition as well.While manufacturing GVA is forecast to have grown 7.7% in 2016-17, the IIP data show the production in the sector has actually contracted by 0.3% in the first 11 months of the last fiscal.

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