Iip

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 autoancillaries, 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