The new numbers should spread cheer also among those who were part of the Manmohan Singh-led United Progressive Alliance (UPA), earlier accused of having presided over a steady deterioration in industrial performance, particularly in the last two years of its tenure.
This is because India's industrial output growth in the past five years has begun looking a little better after Friday’s base-year revision – a far cry from the anaemic look it used to sport earlier. Against the earlier estimate of 1.4 per cent average annual industrial growth in the last five years, the new estimates place the average annual growth at 3.8 per cent.
More significantly, the average annual industrial growth in the last three financial years of NDA is now estimated at 4.1 per cent, a sharp jump over the none-too-impressive number of just 1.96 per cent computed earlier, and that for a government which promised to revive manufacturing.
But the Manmohan Singh-led UPA seems to have done even better by clocking average annual IIP growth of 3.35 per cent in the last two years of its tenure (2012-13 and 2013-14) compared to the earlier estimate of just 0.5 per cent. Remember that these were the two years when a so-called paralysis in decision-making and corruption-ridden governance had arguably taken a heavy toll of industrial output.
That narrative now may well be challenged.
Indeed, the revised numbers make the industrial output recovery claimed by NDA in the first three years of its tenure look far less impressive. And UPA's performance on the industrial output front looks a little better.
According to the earlier base-year estimates, the NDA years saw more than trebling of average annual industrial growth over what UPA achieved in its last two years. But the new base-year numbers show the NDA years' growth going up by just 22 per cent over what the UPA years had achieved.
Such is the power of India's Central Statistics Office (CSO) that on Friday changed the base year of the all-India IIP from 2004-05 to 2011-12 to reflect the changes in the industrial sector and align it with the base years of other macroeconomic indicators like the Gross Domestic Product (GDP) and the Wholesale Price Index (WPI). While putting out the rosier industrial growth numbers as per the new base year estimates, the CSO, however, has issued some caveats and explanations of the turnaround.
One, it has pointed out that the growth rates of the two series are not strictly comparable as the indices for 2011-12 have been normalised to 100 at a monthly level. However, this does not detract from the overall impression that industrial growth figures for the last five years do look better after the base-year change.
Data from more factories
Two, there is an increase in the number of factories whose data are now being reported and captured in the industrial growth data under the 2011-12 base-year series. In addition, the data coming from factories that are closed have been removed, making the new data set more representative and reflective of the current state of affairs. This could be one of the reasons for the upward revision in the numbers under the new base year.
42 item groups dropped
Three, the new base-year series expands the basket with the inclusion of new item groups and exclusion of old ones. As many as 42 item groups that were part of the 2004-05 base-year series are deleted from the 2011-12 base-year index. This is much more than the 22 item groups (including offshore platforms, typewriters, sewing machines, tape recorders, pencils and organic pigments) that were dropped while framing the 2004-05 base-year index.
Presumably, the performance of items that have been dropped was poor and their exclusion has reduced the adverse impact on the overall industrial output performance. The item groups dropped from the 2011-12 base-year index include gutka, pan masala, fabrics, synthetic yarn, sacking, leather gloves and shoes, lubricating oil, glycerine, synthetic resins and benzene.
50 new item groups added
Similarly, 50 new item groups were added to the revised IIP with the latest base year of 2011-12. Specific details of the new item groups are not provided by the CSO, but it can be presumed that these inclusions have helped boost the revised numbers.
124 manufacturing items axed
Within the manufacturing sector, the extent of deletion and inclusion of items (not item groups) has been larger. As many as 124 items have been excluded from the manufacturing sector and these include calculators, biaxially oriented polypropylene films and colour television picture tubes.
The number of items in the revised manufacturing sector now is 809. This would suggest that the CSO has added as many as 313 new items in the manufacturing sector list for the 2011-12 base year index. No wonder, the base in the manufacturing sector has expanded giving a fillip to the growth numbers.
However, the CSO’s official explanation suggests that only about 149 items like steroids and hormonal preparations, cement clinkers, medical accessories, prefabricated concrete blocks and refined palm oil have been added. But clearly there would be more items without which the new number of 809 items in the manufacturing sector does not look feasible.
Increase in weights for manufacturing to 1980-81 level
The weight of the manufacturing sector in the IIP is now raised to 77.63 per cent, compared to 75.5 per cent in the 2004-05 series. This too has helped improve the new base-year series numbers.
The manufacturing sector has seen perhaps the most significant changes in Friday’s base-year revision, the ninth such exercise that began with the first IIP choosing a base year of 1937. Since then, the base years for IIP have been revised periodically and the subsequent base years are: 1946, 1951, 1956, 1960, 1970, 1980-81, 1993-94, 2004-05 and now 2011-12.
What is also clear from the past 67 years’ exercise of releasing a monthly IIP number is that India’s statisticians have been sharply focused on the manufacturing sector right from IIP’s inception. The IIP with the base year of 1937 had allotted a weight of 92 per cent to the manufacturing sector. But by the time the base year went in for its sixth revision and the base year was pegged at 1980-81, the weight for the manufacturing sector declined to 77 per cent, which is broadly identical to the weight given to the manufacturing in the 2011-12 base year. The manufacturing sector’s weight, meanwhile, had gone up to 79 per cent for the 1993-94 base year, before declining to 75.5 per cent for the 2004-05 base year.
Renewable energy resources included
Four, the electricity sector in the 2011-12 base-year IIP includes data from renewable energy sources, indicating the growing share of such power generation companies in the Indian economy. Yet, however, the weight for the electricity has declined in the latest base-year calculations, placing it at 7.99 per cent, down from 10.3 per cent in the 2004-05 base year. This is the only sector whose weight in the revised index has gone down even though a new category of renewable energy sources has been included in the electricity sector.
Five, the coverage of the mining sector has been significantly expanded, though its weight has remained almost the same at 14.37 per cent in the 2011-12 base-year index. Inclusion of newer varieties of mining items – both metallic and non-metallic has made the contribution of the mining sector to IIP even more significant.
How have the new series numbers captured the impact of the demonetisation of 86 per cent of India’s currency on November 8, 2016? At the IIP level, the monthly growth figures from November 2016 onwards show a marginal increase in the new index compared to the growth figures under the old index. In comparison, the improvements under the new base-year series in months prior to demonetisation were much more pronounced.
This seems to suggest that demonetisation did have some impact on the months of industrial production from November 2016 onwards, captured under the new series. For instance, the 2004-05 series shows industrial output in the April-October 2016 period to have declined by 0.3 per cent. In the post-demonetisation period of November-March 2016-17, it picked up marginally to record growth of a little over two per cent. But industrial output in the April-October 2016 period under the 2011-12 series shows growth of 6.3 per cent and decelerates to only 3.3 per cent in the five months between November 2016 and March 2017.
Buffalo meat retained
The new series continues to include both fresh and frozen buffalo meat in the index, reflecting the statisticians’ belief that this sector would continue to be relevant for data collection and for computing the country’s industrial output. Frozen buffalo meat was included in the manufacturing sector, for the first time in April 2011 when the base year for the IIP was revised to be 2004-05.
Impact on GDP numbers?
What could the revised IIP numbers mean for GDP? It is widely acknowledged that the IIP numbers are an important input while estimating the GDP. Given the fact that now the IIP numbers have been revised, it is possible that the GDP numbers too could be revised upwards. Whether that happens or not is a question mark. But if any revision of GDP data for past years takes place, on the basis of the new IIP series, remember that the benefit of higher growth would be reaped not just by the NDA, but most likely by the UPA as well.
Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.