IIP OR PMI - WHICH IS A BETTER 'KAHANI'?

By Ruma Dubey

The IIP numbers are expected tomorrow and though expectations are muted, nowadays there is a lot of talk about Purchasing Managers Index (PMI). This PMI is often being compared with IIP and based on the PMI, calls are being made on the IIP. Plus there is talk of PMI being more reliable than IIP.

Over the last few months, there has been a wide scale divergence between PMI and IIP. PMI has been showing signs of rise while IIP has been down. How can such two divergent trends emerge from the same economy?   

PMI has been growing since November and rose to 57.5 in January, the highest in the past eight months before declining to 56.6 in February. IIP, on the other hand, was at -5.1% in Oct, a contraction and then spiked to growth of 5.9% in Nov. It was at 6.8% in Jan and Feb numbers are expected tomorrow.

But many say that strictly speaking, PMI and IIP cannot be compared at all as it is akin to comparing oranges with apples. Simply put, IIP captures actual YoY growth while PMI captures MoM business sentiments.  PMI has been good while IIP bad as PMI is a reflection of the sentiment while IIP is inundated with data collection and collation problems.

So then what exactly is PMI?  This is a relatively new concept and we have been seeing HSBC putting up India’s PMI numbers every month. This PMI reflects like IIP, the economic health of the manufacturing sector.  It has five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. As the name indicates, it reflects the purchasing power of the managers, which in turn gives a peek into the demand. So a rise in PMI means demand is up for goods and services. This index is calculated purely on survey, with seasonal adjusted variables but does not include the unorganized sector; a huge negative against PMI as India continues to be largely dominated by the unroganised sector.

On the other hand, IIP measures the growth of output from various sectors. The weightage of IIP data is broadly divided into three segments – manufacturing (75.53%), mining & quarrying (14.15%) and electricity (10.32%). The numbers for IIP are usually released within 6 weeks after the end of the month. The figures are revised in the next and the third month based upon the revised Industrial production data furnished by the source agencies. The data is collected from Department of Industrial Policy and Promotion, Indian Bureau of Mines, Central Statistical Organization, Central Electricity Authority and 11 other agencies. 2004-2005 is considered as base year for calculation. i.e. the industrial output in 2004-2005 is considered as 100 index points. And it also takes into account micro, small and medium enterprises. 

But the biggest problem with IIP is the way in which data is collected, which causes data to be volatile. Like the data for Jan 2012 – IIP was at 6.8% v/s 1.8% in Dec, the previous month. More worrying was the consumer nondurable which was at 42.1% v/s 13.4% in Dec. No pent up demand can show this kind of a spike up. Many economists say that data collection in IIP could be plagued with two problems – either data does not get collected every month and when it does get collected, it is all tallied up in one single month and thus the irrational volatility. Or else data is coming in from only a handful plants and then it is generalized for the entire sector.

The Govt too is worried about the integrity of this data. Infact this worry might not have come in at all but for the variation between PMI and IIP. The Govt can shoo away the PMI saying that they both are not comparable but at least the PMI showed that things were not right in IIP. The Govt is exploring the possibility of setting up a single agency to collect data for compiling IIP and even inflation, instead of depending on so many agencies. There is also talk that the base year could be moved from 2004-05 to 2009-10 or 2010-11 and it will also include items like tablets and reduce weightage given to desktops.

The Govt surely needs to rework the way data is collected, classified and collated. Policy decisions, especially those by RBI are based on IIP and it is imperative that it is accurate. And thanks to PMI, comparable or not, at least there is awareness that the accuracy of IIP needs attention. That’s a big step in itself.