Context:

• China’s manufacturing surge is intensifying competitive pressure on India, making it crucial to accurately assess the health, productivity and competitiveness of Indian manufacturing.
• While the government has promoted Make in India and Production-Linked Incentive (PLI) schemes, conflicting signals from manufacturing data raise three questions.
• The Ministry of Statistics and Programme Implementation (MoSPI) has undertaken substantial revisions under the new GDP methodology.
• Hence, there is the need to analyse whether the sector is actually growing as strongly as the latest national accounts suggest, as problems with the earlier manufacturing data series were widely recognised.

Q1: Why is the Manufacturing GVA Deflator Showing Negative Growth?

• The new estimates show the manufacturing Gross Value Added (GVA) deflator recording negative growth for nine consecutive quarters between 2023 and 2025.
• This is puzzling because -
  • Core CPI inflation remained positive.
  • The Wholesale Price Index (WPI) was negative only for some quarters.
  • The GVA deflator should broadly capture changes in prices relevant to manufacturing output.
• The GVA deflator is not identical to either CPI or WPI; it is intended to capture price movements associated with the value added generated by a sector.
• Therefore, divergences from consumer or wholesale inflation do not automatically imply an error, but unusually persistent divergence warrants methodological scrutiny.
• The issue is important because real GVA is obtained by deflating nominal GVA for price changes.
• If the deflator is unusually low or negative, real manufacturing growth can be significantly overstated.

Q2: Why Has Real Manufacturing GVA Diverged from IIP?

• The second concern is the growing gap between real manufacturing GVA and the Index of Industrial Production (IIP).
• Using 2022-23 as the common base (=100), by 2025-26,
  • Real manufacturing GVA was at least 15 percentage points above IIP.
  • Average manufacturing growth between 2022-23 and 2025-26 was approximately 11% according to GVA, compared with about 6% according to IIP.
• The two indicators, however, measure different things. GVA measures the economic value created after deducting intermediate consumption, while IIP is primarily an index of industrial production volumes.
• Real GVA can therefore grow faster than physical output if firms improve productivity, efficiency or the value generated from intermediate inputs.
• The informal sector is sometimes cited as an explanation because real GVA includes informal manufacturing while IIP largely captures the organised/formal sector.
• However, this explanation appears insufficient, because recent GVA estimates are increasingly benchmarked using formal-sector data.

Q3: Why Has the Correlation Between GVA and IIP Weakened?

• Before the 2011-12 methodology change, IIP and real manufacturing GVA moved broadly together, with a correlation of around 0.8.
• Afterwards, the relationship weakened substantially and appears to have become even more divergent in the latest data.
• Since September 2022, the two series have behaved very differently: real GVA has shown strong growth while IIP has remained relatively stable.
• Though this does not prove that the new GDP series is flawed, the absence of convincing explanations makes it difficult to confidently interpret the recent manufacturing revival.

Broader Implications:

• The reliability of manufacturing statistics matters beyond statistical methodology.
• India’s efforts to counter Chinese manufacturing competition, deepen domestic value chains and attract investment depend on an accurate understanding of manufacturing performance.
• The debate also affects assessment of recent government interventions, including Make in India, PLI schemes and other industrial-policy measures.
• If output, value addition and productivity are sending substantially different signals, policymakers need to identify the reasons before claiming a structural manufacturing transformation.

Way Forward:

• India needs greater transparency in national accounts methodology, including detailed documentation of deflators, sectoral estimates and the relationship between GVA and IIP.
• Better reconciliation of different datasets would strengthen confidence in economic policymaking.

Conclusion:

• India’s manufacturing revival may be real, but the magnitude and sustainability of that revival require careful scrutiny.
• Manufacturing is central to India’s employment generation, export competitiveness, import substitution and strategic economic resilience.
• Therefore, improving the credibility and interpretability of manufacturing data is as important as improving manufacturing itself.