CHANGE OF BASE YEAR – MAKES MACRO DATA LOOK SO GOOD!

By Ruma Dubey

For most of us ignoramus, the Base year in economic parlance does not mean much; or rather does not mean anything. But today, when we base all our economic data for making important investment decisions, take a calculated risk even on what the RBI could announce, this base rate holds tremendous significance.

In 2015, the Govt changed the base year for GDP estimates – from 2004-05 to 2011-12. And today, as was promised in 2015, the Govt changed the base year for IIP and WPI – same from 2004-05 to 2011-12. The base year for CPI was aleady changed.

This represents a more realistic picture as the changed base year reflects a more current economic scenario of macro aggregates, taking into account the structural changes that have taken place. The base year is changed by National Accounts Statistics. The Wholesale Price Index (WPI) series in India has undergone six revisions in 1952-53, 1961-62, 1970-71, 1981-82, 1993-94 and 2004-05; now finally 2011-12.  The current series in the seventh revision and entails the shifting of base year, changing the basket of commodities and assigning new weights to the commodities.

Once again what this means is that under the new series, the IIP and inflation numbers will come in much higher than what we saw under the old series. Already in this new series we have seen today, IIP is much higher and WPI is much lower and this naturally means that the GDP/GVA will be much higher.

The changes made:

• WPI will continue to have three major groups namely Primary articles, fuel & power and manufactured products.
• Increase in number of items from 676 to 697.  In all 199 new items have been added and 146 old items have been dropped.
• The new series is more representative with increase in number of quotations from 5482 to 8331, an increase by 52%.
• In the new series of WPI, prices used for compilation do not include indirect taxes in order to remove impact of fiscal policy. This is in consonance with the international practices and will the WPI conceptually closer to the ‘Producer Price Index’.
• A new “WPI Food Index” will be compiled to capture the rate of inflation in food items.
• Seasonality of fruits and vegetables has been updated to account for more months as these are now available for longer duration.
• Item level aggregates for new WPI are compiled  using Geometric Mean (GM) following international best practice and as is currently used for compilation of All India CPI.
• In terms of weightage for calculating the WPI, weightage of primary articles has gone up from 20.12% to 22.62%; that of Fuel & Power has come down from 14.91% to 13.15% and Manufactured products has ao come down marginally to 64.23% from 64.97%.

These changes, especially because of use of market prices, will necessarily mean that we will get higher GDP growth estimates but more importantly, it will be more comprehensive, more scientific. It might not be accurate but it is as close as we can get. And that in itself is a good thing. After all, it is these numbers which RBI also uses to make all important economic decisions.

Before we sign off for the weekend, the macro data which came in; they look extremely good under the new series:

• IIP rose to 2.7% for March v/s 1.9% in Feb
• WPI declined to a four-month low of 3.85% in April v/s 5.29% in March
• CPI declined to 2.99% in April v/s 3.81% in March.

So Industrial growth is up, prices are down; what do we Indians need to worry about? Home coming techies and those working in India losing jobs in droves? Nah!!!