The Index of Industrial Production (IIP) is the only official monthly indicator which gives us an idea about the level of economic activity in manufacturing in the Indian economy. Three-fourth of the IIP basket is manufacturing. What makes the IIP even more useful is the fact that it also gives a use-based classification – capital goods, consumers goods etc. – of industrial activity. A lot of economic commentary on the state of consumer demand in India is based on the performance of IIP’s consumer goods index.
For example, a research note issued on November 10, 2023 by Nomura economists Sonal Varma and Aurodeep Nandi flags the weakness in consumer goods sub-category of the IIP numbers in September. “Consumer durables production has been underperforming other sectors, with only 1% y-o-y growth in September vs 5.8% in August. The Nomura India Normalisation Index (NINI) for IP, which excludes base and seasonal effects, and is indexed to its pre-pandemic level (of 100), shows how consumer durables is not only trailing other sectors, but also trending below pre-pandemic levels (Figure 2). In our view, this speaks to weaker discretionary demand among consumers. September, however, also saw consumer non-durables growth disappoint, falling to 2.7% y-o-y from 9.6% in August.”
A more careful reading of IIP data, however, shows that the index might be a misleading source of reading consumer demand in the Indian economy. This is more because of the way in which the index is constructed rather than any errors by analysts who are reading the headline numbers for the index as a whole or its different sub-categories. What is essentially a statistical problem with the index might have been accentuated because of what is often referred to as the K-shaped recovery in the Indian economy where richer firms and households have done better.
According to Centre for Monitoring Indian Economy’s (CMIE) database, IIP’s consumer durable basket has 86 items. This includes products such as cars and TV sets to cricket balls, knitted garments and terry towels. Not all of these items are measured in the same way in the IIP though. Seven items such as nylon ropes are weighed; another 44 — this includes mobile phones, TV sets and passenger cars — are counted in terms of number of items produced or volume; and the remaining t35, including readymade garments and plastic furniture, are counted in terms of value .
Logically speaking, one can make an argument that if an economy undergoes a transformation in terms of substitution of low value items with high value items in the basket, then there is possibility that the volume index will show a contraction despite a growth in the value index. To give an example , 10,000 feature phones would probably have lower value than 1000 iPhones in the mobile phone category. A similar argument can be made for high value SUVs against entry level hatchbacks. This could precisely be the problem with the IIP’s use to measure consumer demand.
Anybody who has followed the Indian economy over the last few years will agree that there is compelling evidence for a pro-rich shift in consumer demand. There is more than enough anecdotal evidence of a surge in demand for all things premium, from housing to cars to even holidays.
In certain sectors, industry watchers have confirmed such a trend. Indians are buying fewer phones compared to a year ago, but preferences have undeniably shifted towards expensive smartphones. The average selling price of a smartphone in H1 2023 was pegged at $241 (around ₹20,077). That translates to a 13% increase year-on-year, according to research firm Counterpoint. The trend is unmissable amidst the profound decline in smartphone shipments. About 64 million smartphones were shipped in India in the first half of 2023, a decline of 10% compared with H1 2022.
An HT analysis of the IIP consumer durable data actually confirms such a reasoning. If one were to measure year-on-year growth in August 2023 or the April-August 2023 period for weighted averages of the counted, weighted and valued components of consumer durables separately, the first two show a contraction while the third shows an expansion. While conclusive proof of the IIP consumer durable data being contaminated beyond redemption will require serious academic research, it definitely does not pass the smell test.
“The current IIP index is full of problems and it should have ideally moved to a value-added index long ago. When read with the fact that we do not have updated data for consumer spending too, which has made critical series such as inflation and GDP obsolete, informed analysis of the Indian economy has become an impossible task”, said Himanshu, an associate professor of economics at Jawaharlal Nehru University. “The lack of a consumption expenditure data is even more problematic at a time when high value purchases by a small section are driving overall consumption demand and we perhaps are unaware of the absolutely no upward mobility for a very large section of the population”, he added.
Vishal Mathur contributed to this story