S Gangadharan

When the index of industrial production for March 2008 was released recently, the serious loss in the momentum of growth during that month as well as for 2007-08 understandably caused a great deal of consternation.

In particular, the tepid show put out by the consumer goods segment — the incremental spurt, at 5.7% was far less than the preceding year’s 10.1% — it was taken as a sign of weakening consumer demand.

Perhaps so, but not in entirety.

The main causes may be elsewhere. At the macro level, according to the national accounts data contained in the advance estimates and quick estimates for the latest two years, private final consumption expenditure in real terms slackened to 6.8% in the last fiscal from 7.1% in 2006-07, while in nominal terms, the spurt was only fractionally higher at 12.6% than 12.4%.

Though final consumption spending includes several components, it stands to reason that with food prices on the rise, people had less money at their disposal to expend on other items and demand for consumer goods tended to soften as a result.

In line with this trend, manufacturers too curtailed their production, lest they be saddled with an uncomfortable level of inventories. The upshot is some sort of a slowdown in this area of industrial activity.

But, the main culprit may be in the composition of the consumer goods in the IIP. Consider the broad facts first. This segment has a total weight of 286.64 with the consumer durables accounting for a weight of 53.65 and consumer nondurables with a weight of 232.79.

In other words, just about 29% of the weight is allotted to this sector in the IIP and thus impacts to some extent on the general index.

In all, the consumer durables sector consists of 26 items ranging in diversity from AC singlepoly phase house service meters to passenger cars; in the nondurables category, right from pencils and paper and paper board to edible oils and soaps and detergents to cloth and GLS lamps figure, with the total number standing at 63.

The IIP is constructed with base 1993-94 at the base and the choice of commodities had predated this year.

Now, more than a decade and later, the flaws in this make-up are evident.The list includes typewriters and alarm time pieces; today, typewriters have ceased to be important and we have more digital clocks to tell the time.What is omitted is even more revealing.

The IIP does not contain computers and laptops as well as the computer peripherals and accessories.These are commonplace and people spend a considerable deal of money in buying them. And their manufacture is a big time activity. The same story applies to the presentday ubiquitous phenomenon - mobile phones.

It may have been unheard of then and simply out of reach during the initial years of their launch; but, they are cheap and almost every one has it. So, instead of telephone instruments, mobile and cordless phones must find a place in the IIP.

Another example. The IIP has in its list the tape recorder. This has been replaced by portable music systems, MP3 players and DVD players and home theatre.

Simply put, to acquire a more representative character, some of the obsolete items needs to be deleted and new ones added in the IIP.

A second look at the weighting pattern is also necessary. The weight assigned to television receivers is 4.9718 whereas passenger cars have a lower weight of 4.2542. Therefore, even with a higher level of production in automobiles, the low weight tends to depress its index relative to television sets.

What was valid in 1993-94 ceases to have validity now in the context of the automobile revolution in which we have many models and price ranges to suit the consumer taste.

The same argument can be made for edible oils. Groundnut oil and vanaspati have a weight of 2.2420 and 2.0057, respectively, while mustard and rape oil has a weight of 5.2111.

On the other hand, sunflower oil is accorded a weight of only 0.09827 and soybean oil of 0.08641.

Today, eating habits have changed and some intra-shifting of weights may better reflect the realities and the IIP a more accurate gauge of the underlying production trends in industry.

In a nutshell, if the consumer segment turns out to be an under-performer, it may have something to do with the IIP itself and not with this industry as such. The moral is: time for a new IIP has arrived.

Source : DNA