FE Editorial: IIP gets upgraded

Written by The Financial Express | Updated: Mar 30 2010, 06:33am hrs
The announcement made by Indias chief statistician that the country will move over to a new series of the Index of Industrial Production (IIP) with 2004-05 as the base year and replace the obsolete 1993-94 series comes not a day too soon. Innumerable delays of the earlier efforts to shift the base year to 1999-2000 had forced the Central Statistical Organisation (CSO) to move the base year even closer to 2004-05. This changeover will markedly improve the quality of industry data as the basket of goods currently used to measure the growth of output gives excessive importance to sunset products that are fast disappearing from production, including radio receivers, sewing machines, alarm clocks, typewriters, landline telephones, tape recorders, roll films, hair oils and tooth powders. At the same time, either ignored or under-represented is the importance of sunrise products like cell phones, readymade goods, music systems, cars, laptops, commercial vehicles, construction equipment and other products. A more accurate IIP will not only help improve industrial growth estimates but also quarterly and annual GDP figures, which use IIP figures until actual industrial growth is estimated from the Annual Survey of Industries after a huge lag of two to three years.

But revision of the base year is only one factor that will improve the accuracy as there are other equally or more important aspects that have to be taken care of, like the greater representation of products manufactured in small industries, which roughly account for more than a third of the industrial output, and the improvement in the functioning of the 15-odd agencies and sources that aggregate and provide the data to the CSO. Currently, only 18 of the 538 goods in the IIP basket are from small-scale industries and hence the numbers fail to capture the actual trends in the sector. The problems are further accentuated by weak legal statutes that frustrate efforts to collect data from different sources, by poor reporting from establishments covered in the sample and by incorrect reporting. Maintaining accuracy also requires a change in methodology from the current Laspeyres fixed base index, which makes the numbers more inaccurate as the distance from the base year increases, to the more dynamic chain-linked index computation that improves accuracy of long-term comparisons. The CSO will hopefully devise ways to take care of these anomalies in the new index and improve the overall accuracy of industrial and GDP growth estimates.