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Business News/ Politics / Policy/  How IIP underestimates factory output data
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How IIP underestimates factory output data

The IIP series' base is old resulting in a number of biases such as obsolescence of the input basket, weights, says TCA Anant

The monthly index of industrial production (IIP) data released by the CSO showed factory output grew by a paltry 2.5% in 2015-16. Photo: Ramesh Pathania/MintPremium
The monthly index of industrial production (IIP) data released by the CSO showed factory output grew by a paltry 2.5% in 2015-16. Photo: Ramesh Pathania/Mint

New Delhi: The gross domestic product (GDP) data released by the Central Statistics Office (CSO) last month showed the factory output component, including mining, manufacturing and electricity, grew at a staggering 8.76% in 2015-16. However, the monthly index of industrial production (IIP) data released by the same office showed factory output grew by a paltry 2.5% during the same period.

What explains the huge difference? While it is known that the IIP measures output growth, and GDP data under the new series 2011-12 measures value addition, the huge gap in both estimates cannot be explained so simply.

“IIP is an old series (with 2004-05 base year). When the base becomes old, it is subjected to a number of biases such as obsolescence of the input basket, obsolescence of the weights. In addition, because IIP is constructed as a fixed group of entities which are tracked, it is also subject to typically a downward bias in estimate," explained chief statistician of India T.C.A. Anant.

In each sector, CSO picks up a few factories, the growth of which determines the overall growth of that sector. For example, the Chennai factory of Finnish telecom firm Nokia was one of the entities CSO was tracking for its “Radio, TV and communication equipment & apparatus" segment in IIP. The shuttering of this plant sparked huge volatility in the IIP number.

The Nokia plant, which was opened in 2006, directly employed 8,000 people. The plant remained under freeze for a long period over an estimated 10,000 crore tax dispute with the Income Tax department. The factory made handsets under contract from Microsoft Corp. for a year, after which the US firm terminated the manufacturing agreement. After this, Nokia formally suspended operation at the plant from 1 November 2014.

The large negative bias that the shutdown of Nokia’s Chennai factory introduced in the factory output data continued for almost three years, starting December 2012.

Without naming Nokia, Anant said that at the time the base year was selected, the entity was very large in the segment. “Then that entity closed down. So, IIP saw huge shock because of that entity closing down. The segment continues to grow. Many other new entities have come up and they are now growing. However, the IIP does not pick them up because the current method of construction of the existing series does not allow us to add a new entity or exit the old ones," Anant said.

Under the new IIP series with base year 2011-12, which is planned to be launched by the end of the year, the methodology allows replacement of an obsolescent entity with a new one which will take care of such huge volatilities, Anant said.

Anant said the difference between production and value added will always be there and hence the difference in IIP and its segment in GDP. “That is a conceptual difference. The new series will only take care of the obsolescence part. In countries like ours, when institutional change takes place, then technology improves. The divergence between physical production and value added becomes more marked. The base revision will only correct the item and weight as well as entity obsolescence," he added.

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Published: 14 Jun 2016, 02:49 PM IST
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