The Hand of God

A miracle has been achieved. Indian manufacturing suffering from a slowdown since March 2000 has suddenly become healthy. And that too by a slight (!) change in data.

The government of India achieved this near impossible feat by a very simple trick. On 12 th of January when the government, in its apparently routine monthly press release, provided industrial production data, there was a note. The note said that the CSO (Central Statistical Organisation) that provides the data, had revised the components of the Index of Industrial Production (Manufacturing) since April 1998.

And with that note lo and behold the Indian economy was pulled out of the recession! A sleigh of hand that even Maradonna would have envied!

Here is what the CSO did. It deleted the data for the production of four items: radio receivers, photosensitised paper, chassis for heavy commercial vehicles (buses and truck) and engines from the Index of Industrial Production. These items had grown very well in the year 1999-00. Deleting the growth in these items from index let to a reduction in the growth rate in that year ( see Table ). Or, growth in the year 1999-00 was pulled down by this seemingly small change. The grounds for the change given were that the production in these were reported by single producers. Thus it was subject to significant variation. One would have thought that the thing to do was to improve coverage but instead the CSO chose to delete these from the index. Manufacturing production is henceforth to be measured without including these.

Growth Rate of IIP (Manufacturing)

So, what was achieved by this? The same thing as when we put your hand from one tub of lukewarm water to another tub of lukewarm water: the water does not appear cold. If instead the hand had first gone into a tub of hot water, the lukewarm water would have appeared cold.

By pushing down growth in 1999-00 the figures for 2000-01 look better. What had appeared to be a downturn in growth rates looks to be merely a longish period of sluggish growth!

But amazingly such exercises by the government do not seem to be pointless. Remember the effect the good news about IIP had!

Riding on the wave of good news, business sentiment reached new heights last year. In February and March 2000 the BSE sensex and NCAER's Business Confidence Index were at a peak.

And remember the effect the bad news - the news of the slowdown had. It pulled it down. Was it that instead of relying on his own company's performance for indicating his confidence levels, the indian businessman was relying on the government and the media?

For the time being the CSO will have us believe that the revised series is the true representative of the state of the manufacturing sector. But sooner or later the data may be revised again. Because for instance, the production of commercial vehicles is currently growing poorly. Indeed growth in the sector has been negative. (Commercial vehicles registered an absolute decline of 40.5 per cent in November 2000 over the November 1999 figure.) So chassis produced for commercial vehicles and engines can be deleted from the series because the series would look worse when they are included. But when their production picks up then including them will push up IIP and so maybe reasons will be found to bring them back. And then the re-revised IIP will provide the necessary good news to lift the spirits of the economy!

To look at the bright side of things Mr. Yashwant Sinha need not no longer spend sleepless nights before the budget. The feel good factor that business needs doesn't have to come from his budget. It will come from the Statistical Office. Also the government, corporates, reasearch institutes, the media (and dotcoms too) can save the money they were spending on employing economists. The already much maligned, and probably quite useless task of analysing data provided by the government has made even more redundant with the innovative revisions by the government and its effects on the wise Indian businessman.