Value of capital goods may reduce IIP volatility

A worker cuts a metal pipe inside a steel furniture production factory in Ahmedabad
There are 189 new items in the revamped Index of Industrial Production (IIP), while indirect taxes have been excluded from the price of items in the new series of the Wholesale Price Index (WPI), to insulate this measure from fiscal policy.

 

And, while the new method of measuring capital goods in value terms is expected to reduce volatility in the IIP, it is unlikely to do so entirely. Capital goods are now being captured in terms of a ‘work in progress’ calculation, the data being collected in value terms. With many of these having a production process spanning over a month, continuous production will be accounted for and fluctuations in the capital production data are expected to be addressed.

 

Chief Statistician T C A Anant said IIP would remain intrinsically volatile. This is due to the inherent nature of output measurements, affected by economic or socio-political changes.

 

As for the WPI, impact of the goods and services tax (GST), scheduled to be rolled out from July, will not be seen on it. The impact would be there on Consumer Price Index (CPI)-based inflation, Anant said.

 

WPI, he explained, would now be closer to the Producers Price Index (PPI), measuring price movements received by domestic producers, it is widely tracked in advanced countries.

 

These are among the changes made to the two indices, launched on Friday by the government. As mentioned elsewhere, the base year of calculation for both have been updated to 2011-12 from the earlier 2004-05, in line with the new gross domestic product (GDP) and CPI series. Economists and think-tanks have been wanting this new series for IIP, so that GDP numbers can be based on more accurate and realistic data. There has been a demand to update the base years more frequently,  Anant conceded. The latest changes have happened after eight years. The push to better map modern consumer interests have seen the IIP focus more on consumer goods. While the number of item groups in the consumer durables segment have doubled from 43 to 86, that for non-durables grew to 100, from 89. A new category for infrastructure and construction goods has also been introduced, with 29 item groups. Overall, among the three broad sectors of manufacturing, electricity and mining covered under the index, the dominant manufacturing sector has seen its weightage increased from 75 to 77 per cent.

 

However, the number of capital goods item groups has been decreased from 73 to 67. The largest reduction has been with the 88 item groups under basic goods, coming down to 15 in the reclassified Primary Goods category.

 

The source of data for the index has also been streamlined, with old factories which had stopped production years before having been weeded from the list, said industrial policy secretary Ramesh Abhishek.

 

The sample size for each item has also been increased, with at least four factories reporting data for each. Also, the selection of items has been done at the three-digit level of the National Industrial Classification-2004, from an earlier two-digit level.

 

While the item basket under WPI has been increased to 697 from the earlier 676, as many as 146 old items have been dropped and 199 new ones included.

 

Manufacturing products will continue to make up the bulk of the index, with 564 items. A significant change has been the introduction of 22 product groups under the category, up from the earlier 12.

 

A separate WPI Food Index has also been launched, with the aim of better mapping food inflation, which has consistently stood out as a driver for inflation in the WPI. The index will be boosted by the introduction of seven new fruit and nine new vegetable items.


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