If someone asks you how the Indian market is doing, how would you answer? Or would you say that the Index of Industrial Production (IIP) has contracted for two straight months, so really India isn’t doing too well? Or would you base your analysis on that and look at corporate and personal income tax collections?
The trouble is that each metric points in a direction that is different, although there are multiple means to arrive at an answer. Adding to the confusion is the fact that almost every metric put out by the government is incompatible with every other metric, even if they pertain to the exact same sector!
Results that are distinct
As an example, look in the manufacturing sector at the GVA and compare it to the manufacturing part of the IIP. First, you can say that both pertain to the production sector. But that’s where the likeness ends. While the IIP Making measures the complete number made by the production sector, or gross output, GVA Manufacturing measures the complete contribution of capital and labour in the production process, which will be entirely different from gross output.
So you have a scenario where GVA Manufacturing in the first quarter of the financial year stood at a really powerful 9.1 per cent, but the manufacturing part of the IIP truly contracted by about 0.8 per cent in that span. So what can the layperson make out of this? More value has been added to that outcome, although total output is shrinking? Nothing, with no degree in economics. Probably nothing rewarding with one.
Then, you've got the problem of genuine measurement. The IIP uses the amounts of 2004-05 as the base year, against which all succeeding index moves are pegged. All other metrics, including GDP and GVA, and the inflation indices, have moved to some more recent base year of 2011-12. What good can come of a metric pegged to some base greater than a decade previously?
Or, for that matter, examine the all important inflation figures put out by the government. You will find two sets of numbers that come out every month, the Wholesale Price Index and the Consumer Price Index.
Add to this the fact the two indices look at different baskets of products and have different weightage for each type, and you've got a system that only the Reserve Bank of India can decipher. Hopefully.
Both indices moved in tandem — as they should — for a short time. But at about the start of 2015, they started to diverge. In September 2015, at the peak in their divergence, there was a 9 percentage point difference between both indices, with the CPI at 4.4 per cent and the WPI almost just that, but in the negative!
So what does it mean that the two indices now are converging and are closer to each other than they have been in a lot more than two years? Can the man on the street glean anything about how costs in the local marketplace are going to move from this information,?
As mentioned previously, tax collections are an useful metric to estimate income increase, since the naive assumption always is that if corporate and personal income goes up so will tax collections are ’sed by the authorities. But this is India, where only 5.5 per cent of the earning population pays income tax, and where a substantial ball of corporates gets away with paying zero tax thanks to the various exemptions and tax havens they can avail of. Any graphic arising from this data is by default a seriously incomplete one.
Then we come to the periodicity of the data releases themselves and the enthusiasm with which they can be mentioned. What can one actually make out from such a granular investigation while it's important from a transparency and policy perspective for the authorities to release industrial data on a monthly basis?
However, experts in the media and industry equally take every monthly amount and scrutinise them as if they will actually provide some insight. Taking a look at the IIP, the monthly figures since 2011 have a standard deviation — or any specified month’s performance can differ from your average — of 3 percentage points. What decisions can anybody draw from data that swing wildly on a monthly basis?
Finally, we come to one among the most significant facets of such data releases: data collection. Why can it be that we're sceptical of the quality of service supplied by, say, someone in a government office, or an Air India worker, but somehow hold the data collectors of the Ministry of Statistics as paragons of efficacy? The Government Inefficiency Discount must be applied by us to data collection as well, which further erodes the veracity of the numbers.
So, all in all, when someone asks you how the market answer accurately, is doing and say: “I don’t understand.”