With the CPI inflation index now also re-based to FY12 along with GDP, the Index of Industrial Production remains a bit of an oddity. Much like the GDP data which presented good news—quite unbelievable though—the re-based CPI also has good news since, under it, core CPI is down to 3.9% in January which is significantly lower than December’s 5.3%. As a result, most expect CPI in FY16 to considerably under-shoot RBI’s target, opening up room for another 50-75 bps of rate cuts by then. It is the IIP that confuses this pretty picture of inflation coming down and GDP picking up —inflation, it has to be recognised though, was falling under even the older series. For FY14, IIP growth contracted marginally as compared to industrial GDP that shows a rise of 5.3%; and in the first 9 months of FY15, IIP shows a growth of 2.1% as compared to around 5.6% for industrial GDP (without construction).
The reason for this is that while IIP reflects physical production, the GDP data reflects value addition and, according to the new series, there has been a phenomenal hike in productivity levels or value-added—under normal circumstances, both physical production and value-addition growth move in tandem. Under the circumstances, the IIP data that is released every month is pretty much useless since it is not quite clear what it is telling you. Sure, it indicates what is happening to physical production, but if value added is to move in another direction, what is the point of getting data on physical production? To some extent, the problem will reduce a bit when the IIP is re-based as it is expected to in a year’s time, and the FY05 base replaced with a FY12 base—once the coverage of IIP is increased, the usual 100-150 bps difference seen between IIP and ASI data will possibly be a thing of the past. While re-basing, and hopefully adding new data sources, will raise levels of IIP growth, this will still not get you to the levels shown in the GDP data. But what will happen, though, is that the phenomenal hikes in productivity that are showing up in the GDP right now—most likely exaggerated due to faults in the interpretation of data—will get evened out over the next few quarters; indeed the head of the National Statistical Commission has also said as much in response to questions as to whether, with GDP touching 7.4% in FY15, the days of 8% growth were much closer than earlier thought. Till the time the IIP is re-based though, perhaps economists and the media should stop focusing on it every month, and drawing attention to how the story it is telling is very different from the one told by the GDP.
