New IIP to use value of some capital goods

The new index would mainly be for those capital goods which have long gestation periods

To ensure an accurate picture of economic activity at a point of time, a new Index of Industrial Production (IIP) would include value of production of some capital goods in various phases of production, instead of their volumes at the final stage. This would mainly be for those capital goods which have long gestation periods.

“Some capital goods take a long time to be produced and their output is only captured once the goods move out of the factory. But that does not mean that before it came out as a final product, there was no production,”  Saumitra Chaudhuri, chairman of a committee constituted to revisit IIP, told Business Standard.

 

To capture this, the new IIP would take into account the value of production of some capital goods and estimate it at various stages of production, he said. The committee recently formalised its final report and will submit it to the government soon.

Chaudhuri said it sometimes became very difficult to get the exact production figures in some capital goods. In such a case, it is better to capture the value of production, which will give a fair picture of the actual industrial activity. Data on capital goods in the IIP is  highly volatile because of which the entire index shows sharp variations.

There is a possibility that after the value of production of capital goods  in various stages of production is taken into consideration, volatility might come down. However, economists are divided over the issue.

“I don’t agree that using value of production for estimating production of capital will bring down volatility. The present procedure provides that if production is happening in parts, manufacturing units have to report the percentage produced to get a correct IIP, which does not happen,” National Statistical Commission chairman Pronab Sen said.

He said the problem with using value of production to determine part production of capital goods was the price at which it would be indexed. “Also, how will that arrived value be converted into units produced. It is not an objective method of measuring part production of capital goods,” he added.

Soumya Kanti Ghosh, chief economic adviser of the State Bank of India, however, disagreed. He said using value of production could help in reducing volatility in the IIP. capital goods have almost nine per cent weight in the IIP. Machinery and equipment among other goods form part of capital goods in IIP.

Chaudhuri said it was never a mandate of the Committee to check volatility in IIP. Even if value of output of some capital goods is used, there is no guarantee that it will end volatility.New-age items like cell phones, tabs and laptops could also find a place in the expanded list of IIP at the cost of defunct things like type-writers.

New IIP will have over double of existing 800 items. It will have a 2009-10 as the base year against 2004-05 in the present series.