IIP blunder: More than unfortunate

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Bikky Khosla | 17 Apr, 2012
Data is the best friend of analysts, but when wrong it fast becomes a foe. Our trade data is no exception. Last week, the Centre revised the industrial production data for January, lowering the growth rate to 1.1% from the previously reported 6.8% after detecting an error that was due to "incorrect reporting" of sugar production data -- a development that has taken analysts and economists by surprise.

When the January Index of Industrial Production (IIP) data was released officially last month, showing a pleasant but surprising bounce back in industrial growth, only a very few felt the need to recheck it despite the fact the "spurt" somehow sidestepped the moderation in growth witnessed by some key infrastructure and manufacturing sectors with their high weightage in the index. The data came also with some surprising figures, such as 92.6% growth in the food and beverages segment.

The Finance Minister has termed the goof-up as "disappointing", a politically correct word, which was widely used in earlier occasions when GDP data for the first quarter of 2010-11 was miscalculated, and when export data in the last financial year showed a major discrepancy. But what about the possible impact of such a blunder? According to PM's Economic Advisory Council chairman C. Rangarajan, such mistakes can cost dear in policy calculations, and therefore need to be checked.

Now, look at the timing of the release of January IIP data; it came a few days ahead of the RBI's last policy review, raising expectation that the central bank might keep the key rates unchanged keeping in mind the high growth registered by the industry, which had long been making a case for a reduction in interest rates. And the RBI did exactly that although we don't know whether the decision was influenced by the IIP figures. But whatever it is, none can deny the possible potential impact of such a miscalculation. In fact, economists have already viewed that GDP growth would be lower than the previously estimated 6.9% in 2011-12 due to these revised figures.

For some time, our economy has been at a crucial juncture facing difficulties in several fronts. This situation demands straining of every nerve in order to achieve a delicate balance in many aspects, be it growth vs inflation, spending vs deficits, exports vs imports, or monetary tightening vs loan interest rates. At this moment, policy calculation with a wrong set of data can lead to catastrophe, affecting every one of us. There must be no repeating of the same.

Meanwhile, the RBI has announced its annual credit policy today, and finally gone for a rate cut, reducing some key rates by 50 basis points, probably considering, among other things, the sharp downward revision in January IIP data, and the slowed down industrial growth again in February to 4.1% -- much below the market expectation of 6.6%.