Nothing durable about it

Financial Express, 25 October 2007

IIP Consumer durables witnessed negative growth in August 2007. It has been showing negative growth since May but the fall was the sharpest in August. IIP Figures show that the production of consumer durables fell by -6.18 percent compared to last year. This is a really striking decline and at first blush it would be an indication of an economy in a deep recession. If India had witnessed a housing market crash and a subprime crises with middle income families losing jobs these numbers would have been easily believable. When people do not build houses or move into new ones, the demand for consumer durables such as fridges, TVs and washing machines goes down. But India is not witnessing such a crisis. Yet the sharply declining IIP consumer durables number is a source of worry for policy makers especially as it has sometimes been suggested that it is due to policy mistakes on interest rates. It is felt that monetary policy has been tightened so much that industry has been pushed into negative growth rates. If this picture is true, then it is indeed worrying. But before we jump to the conclusion that banks should give out credit to retail customers at lower interest rates, or easier credit conditions, let us look at what the data about consumer durables is saying in some detail.

Consumer durables have a weight of 5.37 in the overall Index of Industrial Production. It has 26 components. It is a Laspeyre's index with 1993-94 as the base year. This means that the weights being given to the 26 components are those calculated in 1994-94. Hence, for understanding what the data about consumer durables is saying, we first rescale these 26 weights up to add up to 100.

The biggest item in the basket is telephone instruments with a weight of 11.58. There is no publicly available information which tells us whether this includes mobile telepones or not, but two facts suggest that it does not. First, there were no mobile phones being produced in India in 1993-94 and second, the production of telephone instruments is falling sharply. Month after month the production has been falling -- it shows negative growth rates of -28.2 percent in June, -16.5 percent in July, -24 percent in August.

In terms of weights, telephone instruments is followed by Scooters and Mopeds (weight of 10.85), TV receivers(9.28), passenger cars(7.920), giant tyres (7.34), wrist watches(7.21), motorcycles (7.08), bicycles (6.56), alarm time pieces (5.09). Of these, giant tyres are a capital good and not a consumer good. The weight of the rest of the items is below 5 percent. These include sewing machines, typewriters, domestic meters, tractor tyres, tape recorders and pressure cookers.

In August 2007 half the components of the index grew at zero or below i.e. at negative growth rates. These were TV receivers -45.07, telephone instuments -24.6, utensils(excluding pressure cookers) -23.3, single phase domestic meters -15.76 percent, typewriters -10.28, alarm time pieces -6.1, bicycle tyres -3.8, pressure cookers -3.7, tractor tyres -1.37, small scale industrial production of electric fans 0 and tape recorders 0.

There are two things we notice about the above. First, that in 1993-94 India did not produce many of the items that are produced today and so the production basket is naturally quite different from the production basket of today. Second, we notice that most of the slow growing industries are the ones which are dying out.

The fastest growing industries in August 2007 were polyphase domestic meters (28.4 percent growth over last year), Scooters and Mopeds (18.6), Window type Air conditioners (17.0), passenger cars (16.4), bicycle tubes (12.3), washing machines (11.6). In other words, the high growth sectors are the ones which are of relevance today. They are also the ones for which consumers are more likely to take loans. It is thus wrong to suggest that IIP consumer durables has declined because of hikes in interest rates and to draw the policy conclusion that therefore rates should be lowered.

The other interesting observation one can make from the composition of the durables index is that this index must be hugely understating industrial production today. There are items that are not included in the index at all such as DVDs, split air conditioners, microwave ovens, chimneys, etc. which have started being produced in India only in the last few years. When we look at IIP we are observing those things that have a declining share, are seeing slower growth, and indeed should be seeing slower growth. In addition, many things like telephone handsets are now being imported.

The government needs to urgently revise the index. It must also have a clear schedule for revising the index every 5 years. Wrong data not only leads to the impression that the government is misinforming the public as in the case of the impression being created about inflation data, but it can also lead to policy mistakes. For making correct policy decisions, a difficult task even with the best of data, it is extremely important that focus is put on collection of policy relelevant information. Putting the IIP in order and updating the base, should be done on priority basis.

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