A new series of the Index of Industrial Production (IIP) with 2004-05 as the base year will be used to estimate the industrial growth from April, the first month of the fiscal year 2011-12. The quick estimates to be released in the second week of June will mark a major improvement over the current series, which has 1993-94 as the base year and is outdated in many ways, with the UN statistical commission recommending incorporation of substantial changes to the IIP. So, unless the new Indian 2004-05 base IIP attempts a radical change in the coverage and compilation methodologies, it will lag behind the rest of the world in its sophistication and coverage. We will now briefly look at these various aspects.
What are the origins of the IIP and how has the index evolved over time?
The IIP is one of the oldest indicators that has been used in India. First compiled by the ministry of commerce and industry in 1937, it covered 15 important industries that accounted for 90% of the industrial production. After the Central Statistical Organisation (CSO) was established, it took over the compilation of the IIP from 1950, after revising up the base year to 1946. Since then, the CSO has revised up the base year another six times?in 1951, 1956, 1960, 1970, 1980-81 and 1993-94. As the numbers indicate, while the CSO was prompt to revise the base year once every five years in the initial period as recommended by the UN statistical office, it faltered badly in the later years. Consequently, the base year was revised up only three times in the last 50 years, which badly impacted the quality of IIP data.
While manufacturing had the highest weight of 92% and mining and electricity just 4% each in the first index compiled in 1937, their relative weights have changed substantially in recent years, with the weight of manufacturing coming down to 79.4% in 1993-94 while that of mining and electricity went up to 10.5% and 10.1%, respectively. The 1937 index and the 1946 index covered 15 and 20 industries respectively. Later, the number of items covered by the index went up from 88 in 1951 to 538 in 1993-94.
How will the weightage of the different sectors change in the new IIP, with 2004-05 as the base year?
The weightage for manufacturing is expected to decline substantially in the new index. In fact, an earlier exercise done by the CSO after fixing the IIP base year at 1999-2000 (which was never released) saw the weight of manufacturing decline to 71% while the weight of mining increased to 15.2% and that of electricity to 13.8%. These trends would have been further accentuated in the later period and shrunk the share of the manufacturing sector even further after discovery and production in the new oil and gas fields and the setting up of a large number of power plants in the private sector.
How do the changes in the Indian IIP fare in the global context?
The current procedures for compiling the IIP are broadly based on the manual worked out by the UN statistical office in 1950. However, the manual has been revised substantially by the UN statistics division in 2010, to improve the procedures of compilation and the quality of the data based on country experiences that have helped evolve more economical and reliable methods of compiling data over the years.
An important change recommended by the UN statistics division is the extension of coverage (which is currently restricted to mining and quarrying, manufacturing and electricity, gas, steam and air conditioning supply) to include water collection, sewerage, waste collection and remediation activities. The 1950 guidelines had recommended that water and sanitary services be omitted from the IIP as they involve a considerable non-industrial element. But since water production and waste water treatment is now being increasingly done by business units in many countries, it is now favoured that they may be included in the IIP.
The other major recommendation is in the weighting changes. Historically, countries (including India) have compiled the index using a fixed weight approach, with the weights generally updated at five year intervals. However, the UN statistics division would now prefer that countries opt for a chain linked approach with annually updated weights, which has become more popular across the globe.
Other important recommendations made by the UN statistics division include using the producer price index as the deflator to estimate production volumes and also using new measures to incorporate quality changes. Other recommendations include the compilation and publication of seasonally adjusted IIP data, month-on-month changes and change from the same month one year earlier, and yearly reconciliation of the IIP data with other sources, like the annual national accounts data, to identify quality issues.
Similarly, the international body wants the national statistical agencies to provide users the identity of the main contributors to the changes (the product groups or industries that are primarily responsible for the monthly movement in the IIP) and even the contact details of the relevant statisticians who can answer various questions of the users. Similarly, the users are also to be reminded of the likely size of the revisions based on past history.
What are the indications about the trends in the quality of the Indian IIP data?
Comparison between the IIP and the industrial growth in the national accounts statistics showed that growth rates registered by the IIP suffer from a downward bias. The difference has widened from (-)1.2% in the sixties to (-)2.2% in the seventies and further to (-)2.7% in the eighties. One reason for this has been the IIP?s inability to fully capture the growth from the entry of new firms and products. Another study of industrial growth as indicated by the IIP and the Annual Survey of Industries (ASI) data for the period from 1993-94 to 2000-01 showed that the growth was almost the same till 1998-99 but deviated significantly since then. The evidence suggested that the level of discrepancy in the growth rates of the IIP increased as it moved further away from the base year.