|What's IIP measuring?|
|Tuesday, 13 March 2012 00:00|
Industrial index is now totally unbelievable
Going by the headline industrial growth of 6.8% for January (analysts were looking at a 1.8-2% growth), after December’s 1.8%, RBI should scrap all plans, if any, to lower policy rates when it conducts its mid-term review on March 15—an industrial turnaround, in any case, is also something the HSBC Purchasing Manager’s Index suggested when PMI rose from 54.2 in December to 57.5 in January. But dissect the Index of Industrial Production (IIP) and it suggests, barring one small group of items, the index has contracted and it’s time for RBI to make a large cut in policy rates! What should RBI believe, the overall IIP or its subsets?
While PMI is an expectations survey, IIP is supposed to capture real-life data on the ground, and the sharp fluctuations in it have increasingly made it a bit of a joke with one group of items jumping dramatically in a particular month and completely skewing the index. In the latest data, mining has fallen, electricity has barely grown but manufacturing has grown 8.5%. In terms of the usage-based classification, capital goods, intermediates and consumer durables have all contracted, but consumer non-durables (food items, toothpastes etc) have grown a whopping 42.1% after a mere 10.2% in the April to January period. A 92.6% growth for ‘food products and beverages’ doesn’t make sense at a time when overall GDP is trending down, but its 72.76 weight in overall IIP (total weight 1000) means this alone has added 7.3 percentage points to IIP growth—since IIP grew just 6.8%, this means all other segments contracted during January. Other high growth items are publishing and printing (56.1%) and medical equipment (30%). In terms of the use-based classification, the 42.1% growth in consumer non-durables means this contributed 7.8 percentage points to IIP—once again, that means all other segments contracted during the month, and the industrial turnaround continues to be very narrowly based.
If the government wants users to take its data seriously, the industrial weights as well as the process through which the data is collected needs to be thoroughly revamped—in the past, analysts had begun looking at IIP trends after removing capital goods, which tended to be very volatile, but if more and more sub-components have to be removed for analysis, it seems a good idea to just drop the index, or provide it once a quarter.