Divergent WPI, CPI explains non-alignment of manufacturing GDP and IIP: Crisil


MUMBAI: Divergence in movements of wholesale prices and retail prices explains non-alignment of manufacturing output (GDP or gross domestic product) with the index of industrial production (IIP), a report by ratings firm Crisil said.

Economists have been criticising the new GDP for not being aligned with ground-level indicators. Since the global financial crisis of September 2008, manufacturing GDP growth has been faster than IIP growth.

“One reason for the faster growth in manufacturing GDP is that the growth in value of inputs used for production has been slower than the value of final output,” say Dharmakirti Joshi, chief econoMist and Pankhuri Tandon, economist analyst at Crisil said in a research note. “As a result, the value added has grown faster than the volume of output. The former is used for calculating GDP and the latter IIP.”

The variance may be because, while the IIP measures the volume of output, manufacturing GDP aggregates the value-added which is obtained by subtracting the value of intermediate goods from the value of output, said the Crisil report. In addition, the basket of goods used to calculate the IIP is different from the data used to calculate the manufacturing GDP.

Growth in value of inputs been slower than the value of output because prices of inputs fell more relative to the prices of output. This is confirmed by inflation trends, where WPI inflation (which captures inflation in commodities used as inputs) was consistently lower than CPI inflation (which captures inflation in goods sold in the retail market) since the global financial crisis.

Moreover, real manufacturing GDP is obtained by dividing nominal GDP by the manufacturing GDP deflector. This deflector is composed of the relevant WPI for each sub-sector within the manufacturing sector. Hence, the fall in WPI inflation had a greater impact on real manufacturing GDP than CPI inflation. This further induced real manufacturing GDP growth to increase more than the IIP growth.