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March 15, 2017

Answer to the GDP-IIP conundrum soon

The new gross domestic product (GDP) series faces flak for not being aligned with ground- level indicators, in particular the Index of Industrial Production (IIP). Since the onset of the global financial crisis in 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. This is 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.

Since the manufacturing GDP deflator is composed of the relevant WPI for each sub-sector within the manufacturing sector, 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.

However, since January 2017, WPI has grown faster than CPI. With global commodity prices expected to rise further in 2017, WPI inflation will accelerate from 3.4% in fiscal 2017 so far to ~5% in fiscal 2018, while CPI inflation will see a milder rise from 4.7% in fiscal 2017 to 5% in fiscal 2018. This will increase manufacturing GDP deflator, and bring down real manufacturing GDP growth, closer to IIP growth. The introduction of new IIP series will further reduce its discrepancy with GDP growth.