Index of Industrial Production (IIP)

What is it: The Index of Industrial Production (IIP) measures short-term changes in industrial activity in the country.

Historical Background: The first attempt to compile IIP in India was made by the office of economic adviser in the ministry of commerce and industry with the base year 1937 covering 15 items of which 13 were from manufacturing and the rest from mining and electricity. The data is released on a monthly basis since 1950 and the Central Statistical Organisation (CSO) compiles it since its establishment in 1951. The base year has been revised seven times by the CSO from its first base of 1946; the latest is 2011-12.

What does it cover?

As suggested by the United Nations (UN) statistics division in 1950, the scope of coverage in IIP could range from mining, manufacturing, electricity, construction, and gas, which has now been expanded to areas including water supply and waste management.

However, in India, due to the unavailability of data and other issues, IIP only covers areas in mining, manufacturing, and electricity. At present, the index taps changes in the volume of production in 809 items falling in 407 different item groups. The inclusion of the products in the index depends on a certain contribution to the total output of the country.

Series (2011 – 12) Item Groups Weights (%)
Primary Goods 15 34.05
Intermediate Goods 110 17.22
Capital Goods 67 8.22
Infrastructure/ construction goods 29 12.34
Consumer Durables 86 12.84
Consumer Nondurables 100 15.33
TOTAL 407 100

The time lag for each report: Index of Industrial Production is compiled and published every month by Central Statistics Office (CSO) of the Ministry of Statistics and Programme Implementation with a time lag of six weeks from the reference month. i.e., at the time of the release of IIP data, quick estimates for the relevant month along with revised and final indices of previous two months respectively, (on the basis of updated production data) are released.

For suppose, if IIP data is released in August 2nd week it could be quick estimates of June month (six weeks distance), and also revised estimates of May and final estimates of April.

How is it calculated?

The items in the index are given different weights according to their relevance and this is revised from time to time along with the base year in order to reflect the changing nature of the economy. The data is released on a monthly basis. The variation is gauged year-on-year. For example, growth in the index for April 2016 will be based on the index value for April 2015.

What does it show?

Since industrial activity contributes about a quarter of our gross domestic product (GDP), this indicator is keenly followed by economists, markets, and policymakers. A higher growth in industrial activity, reflected by movement in the index, will naturally lead to better growth for overall GDP. In recent times, there has been sluggishness in industrial activity due to a variety of factors, which has taken a toll on the overall growth numbers as well.

The controversy

There is also a bit of controversy on the reliability of the data as some components of the index, such as capital goods, have shown very high volatility in the recent past. Also, some sharp revision in data has also led to economists questioning the reach of data collection and reliance on such data for policymaking purposes.

In the absence of any other robust source of gauging the industrial activity, IIP remains an important indicator for policymaking in the country.

Index of Eight Core Industries (ICI)

Of the 100% weight of the IIP the Eight Core Industries comprise 40.27% of the weight. The industries covered in the Index of Eight Core are namely Coal, Crude Oil, Natural Gas, Refinery Products, Fertilizers, Steel, Cement, and   Electricity.

Industry Weightage (%)
Coal 10.33
Crude Oil 8.98
Natural Gas 6.88
Refinery Products 28.04
Fertilizers 2.63
Steel 17.92
Cement 5.37
Electricity 19.85
Total 100

Time lag: Central Statistical Office (CSO) releases the ICI separately 2 weeks before the IIP index is released. That means for June month, ICI is out on July 31(one month lag) but IIP will be out Only in the second week of August (six weeks lag).

The significance of Index of Core industries: The monthly Index of Eight Core Industries (ICI) is a production volume index. The objective of the ICI is to provide an advance indication on production performance of industries of ‘core’ nature before the release of Index of Industrial Production (IIP) by Central Statistics Office. These industries are likely to impact on general economic activities as well as industrial activities.