Better tracking of economy

The new IIP series brings in several welcome changes

The new Index of Industrial Production (IIP) series with 2011-12 as the base year includes some much-awaited changes to methodology and coverage. Not only is the new series a substantial improvement over the previous one, it also sets the stage for further modifications. Some of the significant changes include an increase in the number of reporting factories from which data will be captured and exclusion of closed ones. There has also been an addition of items and removal of older ones that are no longer as important or whose data are not available in a timely manner. As a result, the new series has increased the number of items from 620 to 809.

Changing the weights of some of the IIP segments such as manufacturing and electricity brings the data more in step with the current economy than a base that was over a decade old. Moreover, the addition of new and rapidly growing sectors such as renewable energy will further improve the quality of the estimates and make them more representative of the new economy, which will be useful for tracking economic activity. The switch to a new base is a culmination of a sustained effort to align the data with the new gross domestic product series. The new IIP series has also introduced “work-in-progress” to reduce volatility in the capital goods sector. This is a vast improvement over the old series, which only reported finished goods in a sector with inherently lumpy production schedules. Yet another change to be welcomed is an improvement in the use-based classification by bringing in a new class of “basic goods” in lieu of primary goods and introducing a new “infrastructure/construction goods” component. All of this may seem like simple accounting changes, and to some extent they are. However, a more user-friendly classification undoubtedly helps in analysis of emerging economic conditions. Moreover, the use of the new wholesale price index (WPI), which also uses 2011-12 as the base year, will enable better deflation of the nominal figures reported by units for the IIP. Therefore, not only does the new WPI report prices from double the number of commodities relative to the past, there is also greater conformity between IIP figures and inflation figures.

The government now needs to recognise that superior statistical and coverage methodologies require superior resources. Since the new IIP series is based on a greater number of sampled units, products, and improved methods of imputing estimates, it places significant additional demands of time and effort on the already stretched data hardware and software. The need is also for a very short gap between collection and estimate generation, which means the government has to significantly improve resource allocation towards macro-economic data collection, analyses and reporting. It is time the government switched to a system of constant improvement in products and units coverage, modified collection methods and improved methods of imputing missing data in a fast-changing economic environment. Access to quality macro-economic data is critical for nuanced policy-making. It not only enables timely response, but can also prevent costly mistakes with far-reaching implications for inflation, employment and interest rates, not to mention growth. The government would do well to put more emphasis on this front.