Industrious numbers
Finally the economic recession has
come. People sitting in White House,
Kremlin or Parliament may say that it is
still about to come, but all we know that
it has arrived. The non-satiated great
greed of Americans has pushed almost
whole world in to the worst economic
crisis since Great Depression of 1929.
Anyways the main purpose of this article
is not outcomes of financial crisis. I am
here to discuss how Indian government
has also been confronted by domestic
economic data that has added to the
gloom of economic recession. Indian
economy has been said strong enough to
weather the crisis, But the steep dip in
the Index of Industrial Production (IIP)
has raised too many questions on
strength of Indian economy.
The IIP is the key index used to
measure the status of production in the
country’s overall industrial sector at any
given moment of time. In more general
terms, the index enables an assessment
as to whether the general level of
activity is sluggish or dynamic. Every
month Ministry of Statistic & Programme
Implementation (MOSPI) announces IIP,
which is currently divided in to three
broad segments: manufacturing, mining
and electricity. The respective weight of
these three sectors in IIP index is 79.358
%, 10.473 %, and 10.169 % respectively.
There has been significant decline in the
growth of IIP since December 2007. The
General Index stands at 263.6 in the
month of August, 2008, which is only
1.3% higher as compared to the level in
the month of August 2007. This growth
rate of IIP is the slowest since October
1998. The key contributor to the
presently reported slowdown is the
manufacturing sector that has grown by
just 1.1 % compared to 10.7 % in August
2007. Again growth in mining sector has
slowed from 14.7 % to 4 % while that of
electricity has dropped to 0.8 % from
10.7 % for the comparable time period.
This reported slowdown in the
industry output is happening amidst high
prices, with inflation based on the
Wholesale Price Index (WPI) hovering in
two digits for last many weeks. In
general economics this kind combination
marks for great trouble. For a
phenomenon of declining production and
high inflation marks the advent of
stagflation.
However, the finance minister’s
allegation that IIP is presenting much
darker picture of the industrial
slowdown. According to him the
condition of industrial production is not
too bad. His point has got support from
significant quarters. The Centre for
Monitoring Indian Economy (CMIE) is
among the institutions which argue that
the IIP is flawed in many ways that lead
it to overstate the case for industrial
slowdown. The problem is with the
credibility of data available with MOSPI.
CMIE was appointed as the nodal agency
appointed by Union government’s
Department of Industrial Policy and
Promotion (DIPP) to collect data for the
IIP from industrial units across the
country. When CMIE’s 5-year contract
with the DIPP expired in November 2007,
it was not renewed yet. Policymakers
now acknowledge the lack of quality of
data that was provided by CMIE in past.
The composition of sectors and
products whose outputs are measured in
the manufacturing are critically
outdated. Therefore IIP must be
repeatedly revised and updated,
particularly in times of rapid industrial
change. Eminent International economic
agencies recommend that country
specific IIPs must be revise every five
years. This policy was followed by our
policymakers in yesteryears but now it’s
at a halt. After being constituted in 1937,
the IIP has been revised successively in
1946, 1951, 1956, 1960, 1970, 1980-81
and 19993-94. From 1993-94 we are
considering it as the base year for
calculating IIP with 543 items in the
basket. Central Statistical Organization
(CSO) did attempt to develop a new IIP
using 1999-2000 as base year but its
attempt never completed. CSO has also
suggested to treat 2004-05 as the base
year for IIP.
The first flaw in the system is that
most of the products that constitute the
IIP are reflecting the economy before the
start of economic reforms. After 1991
Indian economic scenario has been
changed drastically. There is a very
famous example in this regard is that it
continues to measure the production of
typewriters and sewing machines
(which nobody use today) but totally
ignores the production of computers
and mobile phone handsets which are
widely used throughout the country. It
also ignores a wide range of other
consumer durables as well as auto-
ancillaries, both of which have been
strong contributor of manufacturing
output in recent years.
The second deficiency of IIP is the data
collection. Its surveys and data
collection efforts have always
concentrated on the bigger industrial
units of the country, particularly those
that are recognized as “factories” under
the Industries Development and
Regulation Act (IDR) of 1951. According
to this act, a factory is defined as an
institution that has at least 50 workers in
premises using electricity driven
machines or 100 workers using
electricity-less production technology.
The small scale sector which comprises
hundreds of micro and small enterprises
has been given extremely limited
coverage by the IIP. Yet this sector is
responsible for nearly 39 % of country’s
overall manufacturing output.
The nature and tenure of
agencies involved in data collection has
also fed the shortcomings of the IIP. For a
very long time, its data collection and
surveys were carried out by the
Directorate General of Technical
Development. This agency was
disbanded in 1995. The CMIE was
contacted by the DIPP in 2002, but its
involvement too marked by constant
differences of the opinions between two
sides. In the recent months, the
government has worked without any
specialized agency that can gather data
across small, medium and large
manufacturing units, particularly those
in private sector. To make up for this
deficit of capacity the DIPP has been
using surveys conducted by Reserve
Bank of India, whose samples are widely
acknowledged to be too small and
unrepresentative of an all –India IIP. It
also uses the findings of the Annual
Surveys of Industries conducted by the
DIPP, which too is regarded too thin and
unreliable for the purpose.
Ironically, the government has
been feeling the pinch of poor statistics
on other economic indicators too. Thus,
the estimates of the monthly per capital
expenditure (MPCE) for the trends in
consumption of basic goods and
services, that is mapped and measured
by the National Sample Survey
Organization is totally at odds of the
consumption trends measured by the
National Account Statistics data. Both
exercises are directed by the Central
government. Again the DIPP has been
feverishly trying to make the Whole-sale
Price Index a more relevant measure of
contemporary inflation by vastly
increasing the basket of goods and
services collected by this measure, but
its efforts have yet to bear fruit.
In recent times, the government
has expressed the need to upgrade
national statistic capacities and systems.
The DIPP is planning to re-negotiate a
contract with CMIE for the IIP data
collection as well as to introduce a
widely rewritten Collection of Statistics
Bill in the Lok Sabha in the coming
session of Parliament. However, such is
the gloom spread by the latest IIP figures
that many leading lights of the ruling
UPA coalition strongly wonder why all
this was not done earlier. This may cause
some unwanted results. IIP is always a
matter of concern for the FDIs coming to
India. The misleading or wrong numbers
can make them think twice over their
decision to come to our country. So it is
quite expected that the government will
take this thing seriously and will make
the necessary corrections in IIP.

Anoop Kumar Mishra

08BS0000432

Section E

Semester II