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IIP: Conflicting views

Oct 14, 2008

Last Friday, the IIP growth number announced for the month of August caused much disappointment to financial markets and industry analysts who were awaiting some signal of positive growth. The August IIP growth was a meager 1.3%, pulling down the year till date IIP growth to 4.9%. Infact, in the year till date, every time the IIP numbers have been declared we have seen its negative impact on the markets. What is IIP?
IIP is an abstract number, which represents the status of production in the industrial sector for a given period of time as compared to a reference period of time. It is a statistical device, which enables us to arrive at a single representative figure to measure the general level of industrial activity in the economy. However it is a short-term indicator of industrial growth.

In simple terms, this figure enables us to know the growth of various sectors in the economy. The Indian IIP is broadly divided into three segments - manufacturing (79.36% weightage), mining & quarrying (10.47%) and electricity (10.17%).

What the numbers say…
If we were to go by the data published in the past few months, we are seeing a slowdown in industrial growth. The manufacturing and electricity segments have recorded poor numbers for the month, growing by 1.1% and 0.8% respectively. This comes in complete contrast when one compares it to last year's growth figures of 10.8% and 9.2% respectively. The mining and quarrying sector recorded a 4% growth as compared to last year's growth of 14.7%.

  • Also read - Opportunities in infrastructure

    But, here comes the twist
    CMIE was the authorised agency to collect the monthly production and weekly price data from individual units and organisations. In November 2007, its five-year contract with the department of industrial policy and promotion (DIPP) ended due to certain issues.

    In its latest release, the Centre for Monitoring Indian Economy (CMIE) has contradicted this data completely. The agency believes that the IIP numbers are not appropriately captured.

    A quote from the latest release describes this aptly - "Financial results of 2,144 listed manufacturing companies show a 33.9 per cent rise in aggregate net sales in the June 2008 quarter. After deflating the sales growth by the WPI inflation numbers, we get a real growth of 22.6 per cent in the sales of the manufacturing sector. This is much higher than the 5.6 per cent growth in production depicted by the IIP in the June 2008 quarter. Considering the large sample of companies for which sales data is available and the wide difference in the growth numbers of their real sales and the corresponding IIP, we conclude that the current industrial growth depicted by the IIP is a gross under-estimate."

    The agency believes that the IIP figures have become less reliable due to the quality of data used in construction of the index. The response rates (from the industry) have also fallen dramatically. This has compounded the problems of IIP's old weights and methodology.

    CMIE has compared the real sales figures of the manufacturing sector with the IIP numbers released. It believes that these differences in figures have been going on for a while.

    Historical data of manufacturing companies
    Month % change in real sales % change in IIP Difference
    Jun-05 11.6 11.3 0.3
    Sep-05 17.0 7.8 9.2
    Dec-05 11.3 8.1 3.2
    Mar-06 17.1 9.6 7.5
    Jun-06 25.7 11.7 14.0
    Sep-06 23.6 13.0 10.6
    Dec-06 18.5 11.8 6.7
    Mar-07 12.3 13.5 -1.2
    Jun-07 8.3 11.1 -2.8
    Sep-07 3.9 8.9 -5.0
    Dec-07 11.4 8.9 2.5
    Mar-08 16.2 7.3 8.9
    Jun-08 22.6 5.6 17.0
    Source: CMIE

    As can be seen from the above table, there is a significant un-reconciled difference in the data collection and computation of the CMIE and the DIPP. While the DIPP has been struggling in data collection for a while due to staff issues, the quality of data assessment has also been suffering. It is believed that the Prime Minister has also lamented the poor quality of official government data. With CMIE having larger experience in terms of data collection, its remarks cannot be ruled out completely.

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