Rebasing of QIM

The base year of the Quantum Index of Manufacturing (QIM) for large-scale industrial units has been updated recently from 2005-06 to 2015-16. This was a major statistical exercise based on a Census of Manufacturing Industries undertaken in 2015-16. The fundamental question is why it took almost seven years after the Census to up-date the QIM?

There were apparently some problems with the implementation of the Census of Manufacturing in 2015-16. The response rate was low at 55 percent, especially by industrial units in Karachi. Also, the rebasing exercise has led to virtually no increase in the size of the large-scale manufacturing sector.

The QIM does not fully cover the production trends in large-scale manufacturing. The latest version of the index covers 78 percent of the sector. The growth rate in the remaining 22 percent could be very different. Also, the information is on production and not on value added. Input-output coefficients can change over time.

One of the key findings of the Census is the diversification of the large-scale manufacturing sector. The share of textiles has visibly declined while that of other industries mostly producing other consumer or intermediate goods has increased. The share of capital goods, which was already small, has further declined.

The first release of the up-dated monthly QIM with the base year 2015-16 was for December 21, with the cumulative growth from July to December 21. The six-month growth rate with this base year is high at 7.4 percent, whereas with the old base year of 2005-06 it was 3.4 percent. What explains this big difference in the growth rate of four percentage points?

The rebasing of the GDP series at constant factor cost from 2005-06 to 2015-16 indicates the difference in the annual growth rate of the large-scale manufacturing sector from 2016-17 to 2020-21 with the two bases as shown in Table-1:

Table-1
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Large-Scale Manufacturing Sector Growth Rate,
2016-17 to 2020-21
====================================================
                          Base Year        Base Year
                           2005-06           2015-16
====================================================
2016-17                      5.6                 4.1
2017-18                      5.1                10.3
2018-19                     -2.6                 3.5
2019-20                    -10.1               -11.2
2020-21                     14.9                11.4
====================================================

The impact of the rebasing on the annual growth rate of the large-scale manufacturing sector appears to be ambiguous. With the base year of 2005-06, the growth rate is higher in 2016-17, 2019-20 and in 2020-21. It is larger with the base year of 2015-16 in 2017-18 and 2018-19.

Therefore, there is need to identify the reasons for the 4 percent higher growth rate from July to December 21. A number of explanations could be offered. First, the growth pattern is such that industries which saw faster growth between 2005-06 and 2020-21, thereby increasing their share in sectoral value added, have continued to be fast growing even in July to December 2021.

Second, new industries may have been added to the index which are relatively fast growing and have performed well from July to December 2021. Third, due to aggregation differently within industries the growth rate could be higher with the base year of 2015-16 than with the base year of 2005-06.

The first part of the analysis relates to which industries have seen significant changes in share of overall industrial value added between 2005-06 and 2015-16. The first category includes industries which have increased their shares significantly. These are shown in Table-2:

Table-2
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Industries with increase in Value Added
===============================================================
                                      Change in share (%points)
===============================================================
Food Products                                              2.55
Beverages                                                  1.03
Wearing Apparel                                            2.64
Coke & Petroleum Products                                  0.89
Pharmaceuticals                                            1.77
Rubber & Plastic Products                                  0.87
Non-Metallic Mineral Products                              4.20
===============================================================

The other industries are those which have seen a significant fall in their shares between 2005-06 and 2015-16, including the following (Table-3):

===============================================================
Industries with Decrease in Value Added
===============================================================
                                     Change in share (% points)
===============================================================
Tobacco Products                                          -0.05
Textiles                                                  -7.32
Chemicals                                                 -1.20
Basic Metals                                              -2.10
Automobiles                                               -1.29
Electric Equipment                                        -0.70
===============================================================

Among the fast-growing major industries, industries like food, wearing apparel and tobacco are the ones which have contributed to faster growth in July to December, 2021. Some industries like coke and petroleum products and non-metallic mineral products have apparently lost their historical buoyancy in the first half of 2021-22.

As opposed to this, industries which have gathered momentum in recent months are chemicals, tobacco, automobiles and electric equipment. Overall, the above-mentioned industries with high growth rates are largely responsible for the faster growth with the base of 2015-16 than with the base year of 2005-06.

A few new industries have been included in the new QIM with base year, 2015-16. Within this group of industries there is a sensational example of industrial growth as shown in Table-4:

===============================================================
                              Weight (%)        Growth Rate (%)
===============================================================
Furniture Industry                   0.6                  594.1
===============================================================

It is truly amazing that this very small industry is responsible for over 40 percent of the higher growth rate in the QIM of 4 percentage points between July and December 2020. The PBS (Pakistan Bureau of Statistics) will need to verify the basis for such an extraordinary growth rate. There is also a number of major discrepancies in the growth rate of individual industries with respect to the base year as follows (Table-5):

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Growth Rate, July-December 2021
==========================================================================
                               With 2005-06 Base         With 2015-16 Base
==========================================================================
Food, Beverages & Tobacco                    3.1                       8.6
Automobiles                                 35.7                      55.9
Chemicals                                    5.4                      14.1
Engineering Products                         1.1                      15.3
==========================================================================

Overall, there are major doubts about the basis for the substantially higher growth rate of 7.5 percent of the QIM with the base year of 2015-16 as compared to 3.4 percent with the base year of 2005-06. The issues highlighted above need to be resolved by the PBS.

(The writer is Professor Emeritus at BNU and former federal Minister)

Copyright Business Recorder, 2022