More value-based items in the new Index of Industrial Production (IIP) series may have inflated manufacturing growth in recent years when wholesale price inflation was low, suggests an article in Ideas for India.
More value-based items in the new Index of Industrial Production (IIP) series may have inflated manufacturing growth in recent years when wholesale price inflation was low, suggests an article in Ideas for India. Since IIP is a volume-based indicator, value-based data in certain item groups are deflated using an appropriate deflator from the Wholesale Price Index (WPI) to convert to volume. This tends to raise the risk of fluctuations in growth rates in sync with inflationary pressure.
While there were 54 value-based items in the old IIP series, the new one, with 2011-12 as the base year, has as many as 109. This partly explains the higher growth rates for the manufacturing sector in the new series than the earlier one in certain periods, especially between April 2013 and January 2014, and from September 2015 until around June 2016 (when WPI inflation was mostly negative or relatively low). The new series revised the annual growth figures in manufacturing from 0.8% to 3.6% in 2013-14, and from 0.1% to 4.9% in 2016-17.
In terms of weight, value-based items constitute 19.22% of IIP (manufacturing) and they account for 25% of the total number of such items. “These shares are significant enough to bring about a change in IIP (manufacturing),” Radhika Pandey and Pramod Sinha of the National Institute of Public
Finance and Policy, and Amey Sapre of IIT Kanpur wrote in the article.
A key finding that emerges from this analysis is that the trends of IIP (manufacturing) are now increasingly affected by movements in WPI. The new series is likely to show inflated growth during times of falling inflation. Therefore, the sharp rise in the growth of IIP need not be on account of actual rise in production volume in industries,” the economists wrote. Although the article doesn’t mention it, in times of rising inflation, the growth rates could also be far from impressive.
The “manufacture of pharmaceuticals, medicinal chemical and botanical products” group has items that are purely value-based (with a weight of 4.9810% in the manufacturing index of IIP), while the “manufacture of motor vehicles, trailers and semi-trailers” group has both volume- and value-based items, with a weight of 4.8573% (3.5192% is value-based and 1.3381% volume-based).
Another objective of the revision in methodology in the new series was to improve the coverage of IIP (manufacturing) to make the index more representative of the structure of manufacturing in the country. While this objective was partly achieved, the index still misses out on the representation of the unorganised manufacturing sector, the economists said.
Although the Central Statistics Organisation says the old and new series are not strictly comparable, the revision has brought new challenges. “…while the revision has improved the quality of the index, its main purpose of capturing volume of manufacturing production has been overshadowed by the nuances of revisions and the technicalities of the index”, said the economists.