Consumer durables in India are in trouble, going by Index of Industrial Production (IIP) data. The segment witnessed negative growth in August 2007. Actually, it has been showing negative growth since May, but the fall was the sharpest in August?IIP figures show that the production of consumer durables fell by 6.18% compared to last year. This is a really striking decline, and at first blush, it would be an indication of an economy in deep recession. If India had witnessed a housing market crash and a subprime crisis with middle-income families losing jobs, these numbers would have been easily believable. When people do not build houses, nor move into new ones, market demand for consumer durables such as fridges, TV sets and washing machines goes down. But India is not witnessing such a crisis. Yet, the sharply declining IIP consumer durables statistic is a source of worry for policymakers, especially since there have been more than mere murmurs that the poor performance can be traced to policy mistakes on interest rates. Monetary policy, say such critics, has been tightened so much that this once-thriving industry has been pushed into negative growth. If this picture is true, then it is indeed worrying. But before we jump to the conclusion that banks should give out credit to retail customers at lower interest rates, or on easier credit conditions, let us look at what the data about consumer durables is saying in some detail.
Consumer durables have a weight of 5.37 in the overall IIP, and the sector has 26 components. It is a Laspeyre?s index, with 1993-94 as the base year, which means that the weights ascribed to the 26 components are those calculated in 1994-94. Hence, to understand the data, we first rescale these 26 weights up to add up to 100.
The biggest item in the basket is telephone instruments, with a weight of 11.58. There is no publicly available information which tells us whether this includes mobile handsets or not, but two facts suggest that it does not. First, there were no such phones being produced in India in 1993-94, and second, the figures show production of telephone instruments falling sharply. Month after month, the figure is on a downslide?it shows negative growth rates of 28.2% in June, 16.5% in July and 24% in August.
In terms of weights, phones are followed by scooters and mopeds (weight of 10.85), TV receivers (9.28), passenger cars (7.920), giant tyres (7.34), wristwatches (7.21), motorcycles (7.08), bicycles (6.56) and alarm timepieces (5.09). Of these, giant tyres are a capital good and not a consumer good. The weight of the rest of the items is below 5%. These include sewing machines, typewriters, domestic meters, tractor tyres, tape recorders and pressure cookers.
In August 2007, half the components of the index grew at zero or below. These were TV receivers (down 45.1%), telephone instuments (-24.4%), utensils excluding pressure cookers (-23.3%), single phase domestic meters (-15.8%), typewriters (-10.3%), alarm timepieces (-6.1%), bicycle tyres (-3.8%), pressure cookers (-3.7%), tractor tyres (-1.4%), small scale industrial production of electric fans (zero) and tape recorders (zero).
There are two things we notice about the above. First, that in 1993-94, India did not produce many of the items in great demand today, and so the IIP base year?s production basket is out of whack with the consumer market of today. Second, that most of the stagnant industries are in the throes of obsolescence anyway.
The fastest growing industries in August 2007 were polyphase domestic meters (28.4% growth over last year), scooters and mopeds (18.6%), window ACs (17%), passenger cars (16.4%), bicycle tubes (12.3%) and washing machines (11.6%). These remain relevant, and are also the ones for which consumers are more likely to take loans. It is thus wrong to suggest that interest rate hikes have hurt the sector, and thus draw the conclusion that rates should be lowered.
It is plain that the composition of the durables index is resulting in a huge understating of industrial production today. DVDs, split ACs, microwave ovens, chimneys and other modern gizmos find no place in the index. Given the pace of technological change, much of what is bought by consumers now simply did not exist when the index was constituted.
The IIP figures, therefore, are extremely misleading in this sector. In addition, many things like phone handsets are now being imported, so domestic production figures are not a reflection of market sentiment.
The government needs to urgently revise the index, and this should be done every five years, on a clear schedule. Misleading data gives the impression that the government has no problem with misinformation, a charge it faces on inflation. Statistics must be saved from the scepticism that has come to surround official data. Above all, policymaking needs reliable data for it to be effective. Further, the government needs to focus on the collection of policy-relevant information. Putting the IIP in order and updating the base should be done on priority basis.
?Ila Patnaik is senior fellow at National Institute of Public Finance and Policy. These are her personal views