In the present tense

The governments decision to move to a new index of industrial production IIP is welcome. Macroeconomic policy-making requires information about the behaviour of the economy. This requires good data. This is particularly true for monetary policy which is often expected to be used to finetune the economy. When there are signs of the economy growing too fast,or overheating,monetary policy is expected to address the issue. Good data is also essential for businesses making plans whichinvolve estimates of growth of demand and production in the economy.

The current index is based on the industrial production basket of the Indian economy in 1993-94. It includes goods no longer in production such as typewriters,black and white televisions,loud speakers and VCRs. It excludes items like mobile phones and laptops. The weights given to items in the basket of goods produced,based on the 1993-94 GDP production data,are outdated. The coverage of the current index is also inadequate. These problems have made the series highly volatile. Month-to-month variations are sometimes impossibly large. A recent example has been a 100 per cent increase in the production of capital goods,which is almost impossible to achieve by many of the factories which were already seen to be operating at full capacity. The reason was found to be insulated rubber tubes whose production was reported to have jumped sharply. Such behaviour posed a dilemma for policy-

makers. Should they have responded to sharp increases or declines in industrial output? Or,should they have ignored them as merely data problems?

The new index seeks to correct these problems. It will have a more recent base year and will use the 2004-05 production basket for assigning weights. It will also improve both geographical and product coverage. The move to a new series,with the CSO also promising to provide historical data based on the new index,will be useful to properly analyse trends and cyclical behaviour in the economy. Hopefully,the new series will show less volatility,which will be one sign of the health of the index and improved data collection methods. The new index is timely as the economy,especially investment,is seen to be slowing down. The current 1993-94 index appeared to be most outdated for production in the capital goods industry,which is a proxy for investment activity in the economy.