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Some Pointers to India’s Revised IIP and WPI

Monday, May 15, 2017 10:06

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In recent times, IIP, the high-frequency indicator of factory output, has been showing far more muted and volatile growth than the manufacturing component of GDP. The WPI (wholesale price index) measure of inflation has also shown unusual divergence from the CPI (consumer price index), differing not only in magnitude but also in direction. The composition of the basket of goods is decided, in the case of the IIP, which tracks production, based on traded volumes of goods in the base year. In the case of WPI, it is based on the volume of goods consumed in the base year. Weights are also assigned to individual items as well as the groups, based on the net traded value (the total transactions in a product) in the base year. The government has released the new series of WPI and IIP under which the base year for calculating the macroeconomic indicators has been revised to 2011-12, from the 2004-05 earlier.The new series is expected to capture the deep structural change in the Indian economy and better reflect contemporary market realities. The revisions are based on the recommendations of a working group headed by Saumitra Chaudhuri (then Member of the Prime Minister’s Economic Advisory Council constituted by Manmohan Singh as well as Member, Planning Commission).

The new IIP now measures output for the basket of goods produced in base year 2011-12 instead of 2004-05. It has been updated by introducing 149 new items into manufacturing, while removing 124 obsolete ones. The number of items in the basket of goods is now 809 (in 407 item groups) against 620 items (in 399 item groups) in the old series. The index is now more broad-based, includes renewable energy, and introduces a new sub-group — infrastructure and construction, reflecting the growing importance of the infrastructure and construction sector in the economy. This will significantly trim the weight of consumer products in the IIP and add to the weight of industrial goods. The capital goods, data will capture ‘work in progress’, on the recommendation of the Chaudhuri working group, which had noted that in the case of heavy machinery and other capital goods, the production may take several months and is reported only in the month when it is completed, causing high volatility in reported data. The decision to count work in progress is expected to smooth out the wild swings in this sub-index. The switch toa new base year and basket of goods are expected to reduce the dissonance with GDP data; however, divergences will remain as IIP by definition measures production in the organised sector, while GDP tracks value added and also covers the unorganised sector.

The revised WPI basket has 697 items against 676 earlier. The updating of base year to 2011-12 from 2004-05 has led to 199 new items being added to and 146 deleted from the basket. So far, the WPI was calculated as producer price plus indirect taxes minus trade discount. A major alteration is the exclusion of indirect taxes while compiling WPI. This exclusion removes the impact of fiscal policy on prices and brings it closer to a producer price index (PPI) in line with global best practices. This would also ensure that no further changes are required during the soon-to-be introduced GST regime. The dissemination of a new food index should be of considerable utility to households, agriculturists and policymakers. Both the IIP and WPI items will now be reviewed on an annual basis by a technical review committee.

Though the new series of GDP, IIP, WPI and CPI are expected to better reflect the true trends in the economy academicians have expressed severe doubts on the quality of data given the nature of ground staff employed in gathering data and the approximations made from small samples lacking use of modern sources in the era of big data.

Source: http://ecofin-surge.blogspot.com/2017/05/some-pointers-to-indias-revised-iip-and.html

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