IIP Measures

The Central Statistical Organisation (CSO) launched the new IIP series in May 2017, following a thorough overhaul of sources and computing methodologies. Changes in the commodity basket include the addition and deletion of commodities, changes in the weight and composition of commodity groups, and changes in data sources. The new series also attempted to improve coverage of manufacturing operations and resolve issues with the manufacturing sector’s diverging developments, as revealed by the 2011-12 GDP data.

The industrial production index IIP measures production and capacity levels in the manufacturing, mining, electricity, and gas industries to a base year.

IIP-Included Items

Since 1950, the Central Statistical Organisation (CSO) has been in charge of compiling and publishing the Index of Industrial Production (IIP) under the auspices of the “Ministry of Statistics and the Programme Implementation.” IIP is released once a month, six weeks after completing the reference month.

Weighted in IIP

• Coal (weight: 4.38%)
• Crude oil (weight: 5.22%)
• Natural gas (weight: 1.71%)
• Refinery Products (weight: 5.94%)
• Fertilisers (weight: 1.25%)
• Steel (weight: 6.68%)
• Cement (weight: 2.41%)
• Electricity (weight: 10.32%)

What is the Index of Industrial Products (IIP)?

• In India, the IIP is a key composite indicator that reflects changes in the volume of output of a collection of industrial items
• IIP tracks the expansion of the manufacturing, mining, and energy sectors
• The goal of IIP is to capture the direction and trend of industrial production in the country, not its absolute value
• It evaluates variations in the volume of output of a collection of industrial products over a short period of time
• In India, IIP is published once a month with a six-week lag
• The basket of the new series has 407 item groups.

Calculation of IIP

The compilation of IIP occurs in several stages.

First, let’s talk about the products.

Then there are sub-groups and big groups.

Finally, for all industries working together, IIP items are drawn from the results of the 3-digit level of the National Industrial Classification-2008.

The selection is made in a way that all of the chosen items contribute to at least 80% of the output of each three-digit group.

Each item is assigned a weight.

Weights are determined at the sectoral level using the sectoral Gross Value Added, which is acquired from National Accounts Statistics for the base year 2011-2012.

Changes in the Base Year

The change in the base year 2011-12, which occurred in 2017, was the eighth adjustment of the all-India IIP’s base year since its inception, with other revisions occurring in 1937, 1946, 1951, 1960, 1970, 1956, 1993-94, 1980-81, and 2004-05. However, the change in the base year shall not have a significant impact on IIP growth figures, and the larger impact is due to differences in the index’s constituent items and the IIP weightage applied to each of them.

When comparing the 2011-12 series to the 2004-05 series, multiple items were added or omitted, which helped to reduce the index’s volatility, particularly for capital goods. Refined palm oil, cement clinkers, and surgical supplies were added, while chewing tobacco, toothbrushes, fans, calculators, watches, and pens were eliminated. In total, 149 new entries have been added to the new IIP 2011-12 data, whereas 124 have been eliminated. Given their rising relevance in manufacturing, the current series items ‘salt and coffee’ have been replaced with’ iodised salt ‘and’ instant coffee’, respectively. The new series included 809 items from the manufacturing sector, compared to 620 in the previous 2004-05 series.

Who Uses IIP Data?

The factory production data (IIP) is used for analytical purposes by various government organisations such as the Reserve Bank of India (RBI), the Ministry of Finance, private enterprises, and analysts, among others. It also calculates the manufacturing sector’s Gross Value Added on a quarterly basis. Meanwhile, some industries may outperform others for a variety of reasons, including international variables, growth potential, business cycle position, and so on. 

Importance of IIP

The IIP represents production growth, and its subcomponents are typically more important than the total index. A resurgence in the capital goods sector inside the IIP, for example, has significant externalities for downstream growth. 

The Impact of IIP on the Economy

• A low IIP indicates lesser industrial production
• This, in turn, might have a negative impact on economic growth and vice versa. 

Conclusion

Several IIP parameters have previously been raised about the IIP index’s dependability. It is widely assumed that additional base-year changes will address existing issues with sources and methodologies. However, the performance of the new series indicates that quality improvements have not resulted in increased confidence in the IIP index. The 2011–12 IIP series presented problems of a different kind.

Deciphering the real change in production is difficult. To summarise our research of the new IIP series, we find that, while adjustments have improved the index’s quality, its basic objective of tracking the amount of output has been eclipsed by revision subtleties and technicalities. In essence, the index of Industrial Production provides a measure of industrial performance.