Antacids make factory data difficult to digest

The Index of Industrial Production rising to a 25-month high in November may point towards a sound manufacturing revival, but it is an innocuous item in the basket that is having a remarkable sway over the headline industrial growth number. A closer look at industrial production data for Apr-Nov shows that half the growth in the index is due to 'digestive enzymes and antacids'—an item with a minuscule weight of 0.22% in the index. Remove it from picture and India's industrial growth in Apr-Nov, as estimated by IIP, falls to 1.6% from 3.2%. In other words, items with 99.78% weight in IIP are contributing as much to industrial growth in India as digestive drugs: curing acidity, heartburn, and upset stomachs is providing as much boost to industrial production as electricity, mining and all other items that comprise IIP. In November alone, digestive enzymes added 240 basis points to the overall growth, pushing it up to 8.4%--the sharpest increase in industrial production since October 2015. The index of digestive enzymes rose by a whopping 110.7% on year in November. Without this spike, growth in industrial production in November would have been 6.0%. So far, in seven of the eight months in 2017-18 (Apr-Mar), digestive enzymes has been the biggest contributor to industrial growth. For instance, in July-the month in which the goods and services tax regime was implemented--the item kept industrial growth from slipping into the red. Back-of-the-envelope calculations show that industrial growth in July would have been -0.5% instead of 0.9% if the item was discounted. Since April 2016, the index of 'digestive enzymes and antacids' has inflated by 185.2% and was at 2556.4 in November. The IIP is no stranger to being heavily influenced by minor items. The CSO revamped its IIP series only last year to make it less volatile. Before the CSO revised the base year for the IIP to 2011-12 from 2004-05 in May, 'rubber-insulated cables'--another item with a negligible weight of 0.12%--was infusing extreme volatility in to the index. Behind the sharp volatility in the index of 'rubber-insulated cables' was its erratic manufacturing pattern. As the item had few manufacturers and was usually produced in bulk depending on the orders received, its index inflated when production started and shrank dramatically when output was cut. The revised IIP series, released last year, reduced the weight of 'rubber-insulated cables' to 0.0136%, lowering its effect on the headline industrial growth number. Accounting for the output of digestive enzymes and antacids may need a similar correction. Crucially, calculation of the digestive enzymes' output has been complicated by the small sample size of data, with information being collected from only four factories, according to CSO officials. "It is hard to say why the index for digestive enzymes has inflated so much," said an official at the DIPP, which now collects the industrial data for the CSO. "The back-data for years prior to 2017 was provided (to DIPP) by the National Sample Survey Office," the official added, requesting anonymity. "It seems likely that a factory which was barely in production in 201112 stepped up production later. When there are very few factories in the sample size, such a situation can have a dominating effect on the index." The Central Statistics Office, in May, set up a technical review committee to assess the list of products in the industrial basket every year to correct such anomalies. Hopefully, the issue of antacids dominating the IIP will be addressed quicker than the case with "rubber-insulated cables".Until then, antacids will keep skewing the IIP numbers.