The new series for the Index of Industrial Production (IIP) seems to be worse than useless for taking policy decisions. The Reserve Bank of India (RBI) governor has said the volatility in the IIP data is “analytically bewildering”. But it’s not just volatility in the capital goods data that’s the problem—the data revisions are equally glaring.
Let’s assume that RBI wanted to take a decision on the monetary policy based on the new series IIP for April. The initial data indicated that the capital goods sector was doing fine, going up 14.5% year-on-year (y-o-y) in April. There was a lot of learned commentary from analysts about how the new series painted a more robust picture of investment demand. Well, it now turns out that the capital goods component of IIP was actually up only 7.3% in April, almost half the original rate. What’s more, the ministry says there’ll be a second revision of the data in July. So the central bank would go woefully wrong if it were to rely on the new series IIP numbers.
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Consider another example—growth in the consumer non-durables component of IIP was down to a mere 2.1% in April. That led several analysts to believe that consumer demand was moderating. Yours truly, being in a naively trusting frame of mind at the time, headlined his piece on the April IIP numbers “Consumption down, investment up”. But the revised numbers for April tell us that consumer non-durables were up 4.9%, more than double the rate initially estimated. And who knows, maybe it will be revised upwards to 10% next month.
There are other, less egregious, revisions in the data. Growth in intermediate goods has been revised upwards to 4.5% for April, from 3.5% earlier. And last month’s common refrain that the moderation in industrial growth is less alarming under the new series now needs to be taken with a large dose of salt, simply because industrial production growth for April has been revised down to 5.8% from the initial reading of 6.3%.
RBI’s mid-quarter monetary policy review last month took comfort from the fact that industrial production in the new series is more upbeat than in the old series—it especially mentioned the 14.5% rise in capital goods for April. Given the revisions in the data, decision makers should make it a point not to take any decisions whatsoever based on the IIP numbers.
Graphics by Yogesh Kumar/Mint
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