The news

India’s factory output, as measured by the index of industrial production (IIP), rose 2.7% in January 2017.  These figures show that the impact of demonetization on the industrial sector was limited.

Key facts
  • Factory output had contracted by 0.1% in December 2016 after growing 5.7% in November 2016, the fastest pace in 13 months, driven mainly by a positive base effect.
  • Data released by the Central Statistics Office (CSO) showed that in January 2017, mining, manufacturing and electricity output increased.
  • Mining output: 5.3%
  • Manufacturing: 2.3%
  • Electricity generation gained: 3.9%
  • The cumulative growth in these three sectors during April-January 2016-17 was 1.4 per cent, (-) 0.2 per cent and 5.0 per cent, respectively.
What explains the current figures?
  • The positive growth for the IIP is largely on account of favourable base effect.
  • A passenger vehicle, a component of consumer durables, has done well in the month of January.
  • In basic goods, steel has been doing well for quite some time.
  • The growth has been mainly on account of electrical machinery and apparatus, which has witnessed growth of about 40% this month, and this is not sustainable.
  • India needs to be cautious about the growth in the capital goods segment as this growth is not likely to be sustainable.
About Index of Industrial Production (IIP)
  • Index of Industrial Production (IIP) is an index which helps us understand the growth of various sectors in the Indian economy such as mining, electricity and manufacturing.
  • IIP is a short term indicator of industrial growth till the results from Annual Survey of Industries (ASI) and National Accounts Statistics (Eg: GDP) are available.
  • The base year of the index is given a value of 100. The current base year for the IIP series in India is 2004-05. So, if the current IIP reads 180, it means that there has been 80% industrial growth compared to the base year, ie 2004-05.
  • IIP is a composite indicator that measures the growth rate of industry groups classified under:
  • Broad sectors, namely, Mining, Manufacturing and Electricity
  • Use-based sectors, namely Basic Goods, Capital Goods and Intermediate Goods.

Note

The Government is likely to change the base year for calculating the Index of Industrial Production (IIP) and the Wholesale Price Index (WPI) to 2011-12. Currently, IIP and WPI take 2004-05 as base year, while the GDP and Consumer Price Index data are calculated using the base year of 2011-12. Using the same base year of 2011-12 for all macroeconomic data indicators will ensure that accuracy is maintained in the mapping of economic activity.

How is Index of Industrial Production (IIP) calculated in India?
  • The products are selected from the results of the Annual Survey of Industries in 2004-05. All the products which contribute 0.20 percent or more to the total value of production at 2-digit industry of National Industrial Classification are included in the item basket.
  • Each item included in the basket is given an appropriate weight. Weight is determined on the basis of gross value added (GVA) from the industrial activity. The weights are considered in order to capture the different economic activities which need to be reflected while measuring the performance of the entire industrial sector.
  • IIP is calculated as the weighted average of production relatives of all the industrial activities. In the mathematical calculation Laspeyre’s fixed base formula is used.

IIP is compiled using data received from 16 source agencies:

  • Department of Industrial Policy & Promotion (DIPP)
  • Indian Bureau of Mines
  • Central Electricity Authority
  • Joint Plant Committee
  • Ministry of Petroleum & Natural Gas
  • Office of Textile Commissioner
  • Department of Chemicals & Petrochemicals
  • Directorate of Sugar
  • Department of Fertilizers
  • Directorate of Vanaspati, Vegetable Oils & Fats
  • Tea Board
  • Office of Jute Commissioner
  • Office of Coal Controller
  • Railway Board
  • Office of Salt Commissioner
  • Coffee Board.
Importance of IIP

IIP is considered as an important data for a number of reasons.  It gives an idea on the overall performance of the industrial sector. It also gives sub-sectoral performance analysis.

IIP is also an important indicator for the Reserve Bank of India, when framing its monetary policy. Though  in the recent years, the CPI inflation data has become a key for the RBI.

However, if IIP data suggests that industrial activity is weak the RBI may refrain from cutting interest rates. On the other hand, if IPP data is higher, it may hold interest rates steady.

Concluding remarks

Though the IIP has served as an important indicator so far, there is a need to revamp the index.

Industry is changing fast over time driven by up-gradation in technology, economic reforms and consumption pattern of the people.

Over time, consumer behavior has changed. The goods which were considered as luxury once are regarded as necessary now. So, it becomes necessary to revise the base rate from time to time in order to capture the changes in the economy.