Volatility in capital goods segment of IIP persists

Volatility continues in the new series of the Index of Industrial Production (IIP).

The government had attempted to address this volatility on account of capital goods, by distributing the production process over the months.

Yet, the capital goods index declined 1.3 per cent in April after rising 9.6 per cent in March, after falling 3.1 per cent in February and 0.2 per cent in January.

The ministry of statistics and programme implementation had come out with a new series of IIP in May, changing the base year from 2004-05 to 2011-12. Beside updating the base year, the method of calculating capital goods was changed, to curb volatility.

The data for capital goods in the new series are now captured in terms of ‘work in progress‘. This is to avoid reporting of production figures in bulk on their completion. And, the reporting unit of all capital goods has been changed from a measure based on quantity to one of value.

“My worry is that we’re now introducing volatility in the index from the price side,” said Pronab Sen, the former Chief Statistician.

The effect will be amplified, since the price deflator is in itself very sensitive, he added. “We have to be pretty sure to have the deflator right.”

The new method might not reduce the volatility, said Soumya Kanti Ghosh, group chief economic advisor at State Bank of India.

From December 2016 onwards, correlation between the old series and the new one increases, he noted.

Even as a price deflator might cause volatility in capital goods, the overall IIP series might also show fluctuation, as it predominantly uses output data.

Earlier, TC A Anant, the Chief Statistician, had said IIP would remain intrinsically volatile. This is due to the inherent nature of output measurement, affected by economic or socio-political changes.

“There is an intrinsic volatility in output data, which will continue to be maintained in the IIP, as entities can run into issues — there can be local factors, labour trouble, climatic factors. Resulting in very sharp changes in production,” he’d explained.

Anant had advised that analysts should use the IIP series over a long run, rather than on a monthly basis, to assess the data.