Is IIP-WPI series base year change beneficial to the economy?

Is IIP-WPI series base year change beneficial to the economy?

The new base year 2011-2012 for calculation of key macroeconomics indicators provides a more realistic picture and reflects market realities. The new series of data showed a decline in inflation for April and IIP growth for March, however. Inflation based on the WPI slipped to 3.85 percent in April as cooling of food article and manufactured items prices was observed. Industrial sector showed a fall to 2.7 percent in March on account of poor performance of the manufacturing sector. In March 2016, IIP growth was 5.5%. But there are critics saying indirect taxes have been excluded and the series is not reflective of the current changes in the economy.

So, does the IIP-WPI series base year change benefit the economy? Is it a game-changing move or a total flop? Let's find out.

Yes

1. Aligns data with new GDP series

IIP data and WPI series is more in line with the realistic picture of the economy, following the base year change. The switch to a new base is a culmination of sustained efforts to align with the new GDP series. This is more comparable with the CPI with a base of 2012. Both CPI and WPI indicates the benign inflation scenario.

2. More Contemporary

The new series of WPI is more contemporary. It broadens the scope of commodities covered under the main segments. Corrective action has to be taken to address the situation of increasing interest rates with twin balance sheet issues, limited investment capacity of private sector and underutilisation of industry's capacity to produce.

Now, the indices are measuring inflation and new industrial production with reference to closer time and corroborate with the real situation. The series remain relevant for identifying new items.

3. Realistic picture of the economy

The new series of IIP displays higher growth rate in months in the period from April 2012 to March 2017, as against when the old series was used. The base shift points to an increase in the number of factories in the panel for reporting data and excluding closed ones, including new items and keeping out old ones.

4. More in line with industry trends

According to ICRA, the improvement in IIP growth in March 2017 relative to February 2017 on a Y-O-Y basis reflects trends from other indicators as well spanning sectors like electricity, mining, manufacturing, trade, transport and financing.

5. Need to revise GDP

GDP is also undergoing revision as a result. Based on the new WPI series, GDP constant price series from 2011-2012 can change significantly.

No

1. IIP Data did not accurately reflect demo results

IIP data of November 2016 did not reflect impact of demonetisation. In December to March, however, the IIP did not return to the level when grown by 5.7 percent. This same trend was found in the old series, whereby IIP growth was 5.6 percent in November, the highest in the post-demonetisation period. So what is the big difference that was expected when the base year was changed?

2. Divergence between manufacturing sector under IIP and GDP to change?

That remains the big question. The revised series is expected to bring down the divergence between the manufacturing sector under the IIP and under GDP as series become more reflective of changes. But the huge gap between IIP growth rates and annual survey of industries/ASI and GDP will not be eliminated This is because IIP continues to be a a volume measure while ASI and GDP are value added concepts. GDP takes data from an enterprise approach while ASI adopts an establishment approach.

3. Question of Intrinsic Volatility

The issue of volatility in IIP on account of capital goods has also been attempted to be addressed with the new series. But this may not fully address the issue. Though distributing production processes over the months on account of manufacturing is an effort being made, intrinsic volatility in output will remain as local factors, labour trouble, climatic issues reflect sharp changes in production.

4. Coverage not adequate, IIP not robust

Although the Ministry of Corporate Affairs has been used as a frame to capture data, so has factories registration. There is divergence between the two. Experts agree that convergence will be over time only.

5. Hardly any options of base year to choose from

2009-2010 was atypical and therefore a bad choice of the base year. Continuing with the old series was untenable but the choice of 2011-2012 as base year, when macro trends exhibit trend reversal, may present analytical challenges.

Limitations of data availability are chronic in India. Data issues also persist in the new series launched in 2015. Data limitations impact GDP calculations. But a false sense of complacency is even worse. The base year change for the IIP, WPI series is more realistic and this points the way for concentrated action needed to rejuvenate the economy and revive the manufacturing sector. Though not without its drawbacks, the new base year could be a good move for the start of “acche din” for many economic sectors and the wider industry.