Industrial growth likely to be much higher than estimates, suggests IIP data

India’s industrial production and GDP have been plunging for three years. But one person believes that major revisions are going to make the data look much better. Pronab Sen, former chief statistician, thinks that the current GDP growth estimate of 5% for 2012-13 may be way short of reality, and revisions could take it above 6%. This is not a pipe dream.

Remember, the GDP growth estimate for 2009-10 was initially 7.7% but later revised to 8% and finally to 8.4%. The 2010-11 GDP growth was revised from an initial 8.4% to a final 9.3%. Why so? The principal reason was the wide, continuing divergence between trends in the index of industrial production (IIP) and trends revealed by the Annual Survey of Industries (ASI).

The Big Picture

The IIP is based mainly on data gathered from large companies, and provides a quick estimate of how things are going. This is the indicator the government relies on for early estimates of industrial and GDP growth. By contrast, the ASI takes time, covers all units employing more than 10 workers using power or 20 workers without electricity. This means it covers the bulk of — though by no means all — small and medium industries.

It provides data on value addition, whereas the IIP refers only to production. ASI data comes with a lag of up to two years. This fuller picture is then used to finally revise estimates of GDP and industrial growth. In recent years, small companies have fared better than large ones. This becomes obvious if we look at the accompanying table.

For instance, in 2004-05, the IIP and ASI growth figures were 11.7% and 17.7% respectively; in 2006-07, they were 12.9% and 19.4% respectively; in 2009-10, they were 5.3% and 11.5% respectively; and in 2010-11, they were 8.2% and 12% respectively.

In only one year in the last decade, 2007-08, was the ASI figure less than the IIP figure. The overall trend clearly suggests that the IIP typically understates industrial value added, often dramatically.

History an Indicator

If this trend has continued — and this seems plausible — then the ASI data for 2011-12 and 2012-13 will also be far higher than IIP trends. This will result in an upward revision of GDP growth too: the current estimates of 6.5% and 5% may rise by a full percentage point or more.

Remember, revisions of this order have already taken place for 2009-10 and 2010-11. Are there any independent reasons to think that small industries are faring better than big ones? Yes, several. One indicator comes from the socalled Bimaru states. Bihar has the lowest ratio of industrial output-to-GDP by far. This may come as surprise to those who have heard of massive public sector investment in Bihar in past decades.

But when Bihar was partitioned in 2000, all the coal, iron ore and other minerals went to Jharkhand. So did the big industrial cities: Jamshedpur, Bokaro, Ranchi and Sindri. On partition, the share of industry in state GDP in Bihar crashed from 22.5% to 4.6%, while that of Jharkhand rose to a dizzy 37%. This dealt a staggering blow to Bihar’s revenue base and industrial prospects.

Yet, once Nitish Kumar came to power, state GDP zoomed to double-digits, thanks largely to his crackdown on gangsters and massive road-building programme. The telecom revolution also helped greatly. Roads and telecom brought connectivity to places that had never enjoyed this.

Connectivity plus public safety so improved the investment climate that small industry boomed (especially in food processing), and industry achieved doubledigit growth despite the absence of large-scale industry. Not a single new power plant came up in Bihar in the 2000s, so the new industries were necessarily small ones using diesel generators, yet they flourished.

Small is the New Big

By contrast, Jharkhand, with all its big industries, did not grow nearly as fast as Bihar, and in many years was among the slowest growing of the Bimaru states. This was partly because of poor governance. But it was also because large industries in general have not done so well in recent years, especially those requiring large land acquisition or clearance for environmental, forest and tribal reasons.

Consider the paradox in recent years of fast-rising power generation even as manufacturing growth has collapsed. A decade ago, manufacturing typically grew twice as fast as power generation. But in the last three years, power generation has actually grown faster than manufacturing. Who is using all this additional power?

One answer could be that with the slowing of large industries, small-scale industries earlier dependent on diesel generators are now using electricity. This may well have improved their competitiveness substantially, enabling them to weather the economic slowdown much better than large industries. Small industries also cater in substantial measure to local consumption — Bihar being an outstanding example — so, the recent boom in rural wages has been to their advantage.

None of this constitutes hard proof. So, we must wait for the revised GDP and industrial data. But I, for one, am willing to bet that the revisions will be substantially upward.

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