THE GROWING GAP BETWEEN IIP AND PMI

By Ruma Dubey

The Q4FY13 GDP numbers came in on Friday and the market had started worrying that RBI might not yet reduce rates or rather, will not rush in with a rate cut in June. And today, the PMI has rattled the market.

March IIP had come in a bit better, at 2.5% v/s 0.6% in Feb and much better from the degrowth of 2.8% on YoY. And this was for the third consecutive month when it came in higher and it was at a 5- month high.

But today, the Purchasing Managers Index (PMI) for May came in at a 50-month low at 50.1 v/s 51.0 in April and this was the third consecutive monthly fall – so it has been falling from March, quite contrary to what the March IIP numbers indicated.

And that makes us wonder about which is really a true barometer – is it IIP or PMI? There has always been a wide scale of divergence between PMI and IIP. PMI has been showing signs of a consistent fall while the IIP has been climbing up for the past three months. How can such two divergent trends emerge from the same economy? 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.

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 bad while IIP good 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, like the IIP reflects 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.  Thus in many ways IIP is more comprehensive than PMI.

But the biggest problem with IIP is the way in which data is collected, which causes data to be volatile. Capital goods sector is an example pointing exactly to that aspect. Two months in a row it has come in the positive. And many concede that March number of 6.9% growth is more of a rogue number as the basket which comprises the capital goods is pretty skewed, not giving us the right picture.  Capital goods include cables and wires, metal ancillaries, rubber and plastic goods, among others and like every month, data continues to remain volatile. In fact, the biggest contributor to the capital goods sector in March was rubber and cables showed a whopping 247.3% growth.

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. 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.