The revision in methodologies of the Wholesale Price Index (WPI) and the Index of Industrial Production (IIP) promises to bring the indices in greater sync with the country’s gross domestic product (GDP) calculation methodology, but the industrial growth may still face a stumbling block in the removal of volatility in its revised methodology of capturing the production of capital goods.
The introduction of ‘work in progress’ as a measure to capture production in capital goods segment is being seen by economists as a good measure to eliminate volatility in IIP, but it’s still a divided house on whether the data will get captured in an effective manner.
“Work in progress addresses the valuation problem in capital goods segment. Earlier, only when the manufactured unit was shipped, the value would get recorded in IIP data … ‘work in progress’ is a good but difficult measure. When it was recommended, we were unsure of how many companies can actually provide this kind of data,” former chief statistician Pronab Sen said.
Earlier, IIP used monthly production data to capture growth in capital goods segment. The production cycle of capital goods generally exceeds a month, and therefore, monthly reporting of production would result in sharp spikes in months when the production would be complete and show a flat trend in the intermediate months of production.
Last week, while unveiling the revised series, chief statistician T C A Anant had also aired concerns relating to continuation of volatility in the new industrial output series, saying that there is “an intrinsic volatility” in output data which will continue in IIP, asking to focus more on long-term trends than monthly trends. “Any index of output collected from a finite number of entities can be volatile … entities can run into issues, there can be labour trouble, climatic problems … all over the world output measures of this type are volatile … I have cautioned users not to read too much into month to month changes of industrial production series … look at the longer run and build for long term trends,’’ he had said.
Economists say that even though the revision in IIP and WPI may not result in an immediate removal of volatility in industrial output, it will certainly help in reducing it and improve the quality of industrial output data and its subsequent representation in GDP data. “The volatility in IIP may not get removed but is likely to reduce. That’s why the focus should be on long-term trends than month-on-month movement in industrial output figures,” said N R Bhanumurthy, professor, National Institute of Public Finance and Policy.
Kotak Economic Research’s economist Upasna Bhardwaj said: “On a quarterly basis, GDP data uses IIP numbers and the revision (in IIP) will definitely improve the quality of real GVA/GDP, if not result in one-to-one mapping between industrial output and growth data.”
Economists, however, agree about the beneficial impact of the revised methodologies on the economic growth data, with the real gross value added (GVA) and, in turn, real GDP growth likely to see an upward revision. The exclusion of indirect taxes from the WPI is also expected to add to the real value of GDP as the WPI-linked deflator for national accounts will be lower. Most economists, however, did not give an estimate of the expected increase in real value of GDP. Also, economists said that it’s difficult to ascertain the impact of addition or removal of items on the trends of IIP and WPI.
“The GDP linked to the new IIP and WPI will have a better representation of the contribution of various sectors of the economy. The GDP growth needs to be reworked for all years beginning from 2011-12 (the new base year for WPI and IIP). Though there is likely to be an upward revision in GDP growth, I cannot comment on the trend as data for each year will be revised and the quantum of growth will depend on the revision in GDP growth in the previous year. Say, for 2016-17,the quantum of Gdp growth will depend on how much GDP number changes in 2015-16,” State Bank of India’s chief economic advisor Soumya Kanti Ghosh said.
Last week, with an aim to bring major macroeconomic indicators of IIP and WPI in line with national accounts, the government changed their base year to 2011-12. In IIP, a total of 809 items are covered from 620 items earlier, with 189 new items added in manufacturing and 33 items removed in mining. ‘Basic goods’ have been redefined as ‘primary goods’, while a new ‘infrastructure/construction goods’ category has been added. IIP growth based on the new methodology has been higher than the growth based on old base year. For 2016-17, IIP growth has averaged 5 per cent in the new series, compared with a mere 0.7 per cent in the old base series.
The new WPI series does not include any indirect taxes, which brings it conceptually closer to the producer prices and also removes fiscal impulse impact. Like CPI, the WPI computation is now based on geometric mean. The new methodology has led to consistently lower WPI inflation than earlier series. For 2016-17, the WPI-based inflation averaged a mere 1.7 per cent in the new series, compared with 3.7 per cent growth in the old base series.