Saturday, 5 September 2015

New series of IIP, WPI and Services

Why in news?
The Central Statistics Office (CSO) is working on an overhaul of key macro-economic indices, including the wholesale price index and the index of industrial production, to better capture growth in production and is also preparing a system to capture production and prices of services.

 IIP: The changes and their impact:

  • More industries: The present frame of the IIP is based on the annual survey of industries. This is now being expanded to ensure that deficiencies are taken care of and the IIP becomes a good indicator of manufacturing activities in the country,
  • Base year: The exercise, which is part of the base revision of the IIP to the base year 2011-12 from 2004-05, is also expected to lead to lesser volatility and more importantly a spurt in growth in the IIP, which has recorded muted expansion in factory output.
  • MSMEs: At present, the IIP is only representative of the largest production units. However, growth is not taking place there, growth is taking place in small and medium units that have more capacity for growth. These are the industries that will be included for data collection
  • Items: About 450 items would be included in the IIP basket as against 399 in the current series and data from at least eight factories per item (in the DIPP list) would be collected to ensure lesser volatility.

Services Index:
  • Meanwhile, stressing on the importance of the services sector, which contributes more than 50 per cent of the share of the national accounts, the government is also considering proposals for an index of service production on the lines of the IIP, an index of service prices as well as an Annual Survey of Services.
  • In India, the only route to get a vague understanding of service production is via the national account statistics and the consumer price index for service prices. 
  • But many services don’t even enter the consumer basket and are sometimes captured through the various surveys by the National Sample Survey Organisation.
Why has there been a divergence between WPI and CPI data? - 
ITEMS, INVENTORY and STAGE
  • ITEMS: The WPI includes everything from raw materials, intermediates, capital and consumer goods. These are all stages in production. When price decline is due to the reduction in raw material prices, particularly global prices, it will first show up in the raw material prices in the WPI — this is the first point of divergence after which prices in each category will reduce. Hopefully this spell would continue and would equalise. 
  • INVENTORY: This transmission of prices from raw materials to finished goods will differ from country to country. In countries which have very little inventory, the transmission will be very swift. But in India, with three to four months of inventories, can take eight to nine months. There would also be gaps in sectors such as agriculture. 
  • STAGE: In the WPI, food prices are measured at the mandi level, while the CPI does it at the local shop level. So trade and transport margins are built into the CPI and WPI and you could have increases there.

 

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