Index of Industrial Production

IIP is a quantitative measure of status of Industrial production in an economy for a given period of time as compared to a reference period. It details out the growth in various sectors in the economy. The Indian IIP focuses on sectors namely Mining, Manufacturing, electricity and general. The current base year used for IIP is 1993-1994. It is published monthly by CSO (Central Statistical Organization).

The index is computed using the weighted arithmetic mean of quantity relatives with weights being allotted to various items in proportion to value added by manufacture in the base year by using Laspeyre’s Index.

General scope of IIP as recommended by the United Nation’s Statistical Organization (UNSO) includes mining, manufacturing, electricity, construction and gas sectors. The present composition of Indian IIP has only three of these due to constraints in data availability on construction and gas sectors. There is an alternate classification also on the basis of use called as Use-Based Classification which classifies sectors into following categories i.e. Basic goods, Capital goods, Intermediate goods, Consumer non-durables and Consumer durables.

The first official attempt to compute and release IIP was made by the office of economic advisor, Ministry of Commerce and Industry with base year of 1937 covering 15 important industries, accounting for 90% of total production of the selected industries. The structure of industry has changed manifold since then and hence there was always a requirement to revise the base year. The successive base years since 1937 have been 1946, 1951, 1956, 1960, 1970, 1980-81 and 1993-94. This is further expected to be revised to2004-05.

It suffers with problems related to quality, availability and compilation of data.

Base Revision

It is expected that the base of IIP will be revised to year 2004-05 which would lead to a new improved series containing improved datapoints, updated product portfolio and revised weights. This revision is a part of government’s move to shift the base year of all the key statistics to a common base. The base year for WPI is currently 1993-94, GDP is 1999-2000 while that of IIP is 1993-94. The new IIP series is expected by the end of the year. In this revision mobile manufacturing will not be included in IIP as it started in India post 2006. There are many issues that can arise due it. Telecommunications sector in India contributes around 2% to GDP (including services). Moreover, mobile phone penetration is on a rise in India which is expected to further increase the scope of mobile manufacturing. In 2006 India produces 31 million mobile phones while it rose to 100 million in 2008. Thus, it forms a significant part of the manufacturing sector and its inclusion would lead to better representation of the sector in the index.
Therefore, mospi is thinking of including mobile manufacturing in the category of landlines. Similarly, ways are being devised to include LCD TV sets in the category of colour TVs.
It includes 534 items that account for 80% of the output of the manufacturing industry.

Recently Released IIP figures

IIP numbers released this October indicated that industrial output expanded by 10.4% in the month of August, 22-month high. The figure stood at 1.7% at same time last year. If we look at individual sector growth rates then manufacturing grew at 10.2% while electricity too saw a growth of 10.6%. Mining was the best performer which grew by 12.9% during August. Out of 17 industries, 14 showed signs of growth. Consumer durables grew by 22.3% due to increased production of television and refrigerators, basic goods by 10%, intermediate goods saw growth of 14.3% and capital goods expanded by 8.3% which is good indicator of increased investment activity in the economy. There can be various factors that lead us to the magical figure of 10.4% (while raising few questions in our minds). Few of these are:

• Stimulus measures by the Government: The impact of various stimulus measures by the government. Reports indicate that government has released stimulus packages worth Rs 3 lakh crore in 2008-09 and 2009-10. The Rs. 1,86,000 crore stimulus package is assumed to have boosted demand for infrastructure. Adding to these efforts RBI pumped more than Rs. 2 lakh crore in to the system to bring down interest rates. Concentrating on the monetary policy, if we analyse the actual amount of credit offtake and the excess liquidity still existing in the economy do we have enough reasons to believe that in times of low confidence the monetary policy works? How far was it necessary for the government to supplement it with fiscal expansion? Is the double digit inflation rate, as indicated by CPI, a result of these measures? Is it justifiable?
• Base effect: Could this high number simply be a result of the base effect i.e. weak numbers in the reference period?
• Real growth in core sector and picking up of exports: India’s core sector clocked reasonablt healthy growth of 7.1% in August 2009 comapred to 2.1% (year on year basis). Out of the six industris that comprise the sector, cement production grew by 17.6% (highest among all), coal 12.9% (YoY) and electricity grew by 9.8%. Infrastrucure growth stood at 7.1% which is a positive sign for the economy indicating revival of demand, spending and confidence in the economy. Also, there are new low cost housing projects coming up in the country (s.a. Tata’s new project in Mumbai) which are being supported by government. This has also generated a lot of FII interest in the Indian stock market especially in real estate, heavy capital goods and infrastructure stocks. What is the impact of global recovery (if at all any) in this growth of the Indian core sector? Also, a revival in the international demand for our exports is a major reason for growth in exports.