Demystifying new Index for Industrial Production (IIP)

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You all know that GDP measures the overall activity (production) in the Indian Economy. But is there any index which specifically captures the industrial activity in the Indian Economy? Yes, this index is known as Index of Industrial Production (IIP).

The Industrial Output data is captured and monitored, primarily, through two statistical activities –

  • Annual Survey of Industries (ASI) on an annual basis and
  • Index of Industrial Production (IIP) on a monthly basis.

About Annual Survey of Industries (ASI)
The Annual Survey of Industries (ASI) is the principal source of industrial statistics in India. It provides information about the composition and structure of organised manufacturing sector comprising activities related to manufacturing processes, repair services, gas and water supply and cold storage.

The ASI is conducted annually under the Collection of Statistics Act, since 1959, to obtain comprehensive and detailed statistics of industrial sector with the objective of estimating the contribution of registered manufacturing industries as a whole to the national income.

About ‘Index for Industrial Production’
The Index of Industrial Production (IIP) is an index which shows the growth rates in different industry groups of the economy in a stipulated period of time. The IIP index is computed and published by the Central Statistical Organisation (CSO) on a monthly basis.

IIP is a composite indicator that measures the growth rate of industry groups classified under,

Broad sectors, namely, Mining, Manufacturing and Electricity

  1. Use-based sectors, namely Basic Goods, Capital Goods and Intermediate Goods.

The IIP is compiled on the basis of data sourced from 16 ministries/ administrative departments. Data for IIP are collected by various source agencies under different Acts/statutes.

What is 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.

Who releases IIP?
Index of Industrial Production (IIP) is released by the Central Statistics Office (CSO) of the Ministry of Statistics and Programme Implementation.IIP is published monthly, six weeks after the reference month ends.

IIP data is sourced by 16 agencies!
IIP is compiled using data received from 16 source agencies viz. 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 and Coffee Board.

IIP covers 682 items!

  • We have already seen that IIP measures industrial growth. It measures the short term changes in the volume of production of a basket of industrial products. The current IIP basket covers 682 representative items.
  • Mining (61 items) – 14.16% weight
  • Manufacturing (620 items) – 75.53% weight
  • Electricity (1 item) – 10.32% weight.
  • Note: Even though United Nations Statistics Division suggests to also include Gas steam, Air conditioning supply, Water supply, Sewerage, Waste management and Remediation activities in the IIP, due to data constraints Indian IIP only covers three sectors – mining, manufacturing and electricity. These three are called broad sectors.
  • IIP also gives us idea about use-based sectors – another classification. Use-based sectors include Basic Goods, Capital Goods and Intermediate Goods.
  • 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 Laspeyres’ formula.

Core Industries and IIP
Coal, Crude Oil, Natural Gas, Refinery Product, Steel, Cement and Electricity are known as Core Industries. The eight Core Industries comprise nearly 37.9 % of the weight of items included in the Index of Industrial Production (IIP). The 8 core industries are their relative weight in IIP is as below:

  1. Coal (weight: 4.38 %).
  2. Crude Oil (weight: 5.22 %).
  3. Natural Gas (weight: 1.71 %).
  4. Refinery Products (weight: 5.94%).
  5. Fertilizers (weight: 1.25%).
  6. Steel (weight: 6.68%).
  7. Cement (weight: 2.41%).
  8. Electricity (weight: 10.32%)
  • Annual Survey of Industries (ASI) Vs Index of Industrial Production (IIP)
  • The Industrial Output data is captured and monitored, primarily, through two statistical activities – Annual Survey of Industries (ASI) and Index of Industrial Production (IIP).

ASI

  • ASI is calculated on an annual basis
  • The ASI is conducted under the Collection of Statistics Act, since 1959.
  • The objective is to obtain comprehensive and detailed statistics of industrial sector with the objective of estimating the contribution of registered manufacturing industries as a whole to the national income.
  • ASI data is based on actual book of accounts and other documents maintained by registered factories.

IIP

  • IIP is calculated on a monthly basis.
  • Data for IIP are collected by various source agencies under different Acts/statutes.
  • The IIP is compiled on the basis of data sourced from 16 ministries/ administrative departments.

What is base period?
The IIP is a weighted average of the production relatives. The production relative is the ratio of the production in the current period to the reference period. This reference period is called the base period. The base period is 3 selected taking into consideration its normality, proximity to the comparison period, availability of all relevant data and synchronization with other macroeconomic indicators.

Why change in base year?

  • The base year is revised periodically to capture the changes in the structure and composition of the industry over time due to technological changes, economic reforms and consumption pattern of the people.
  • The basic purpose of base revision of IIP is to make the item basket proper representative of the current industrial scenario of the country.
  • Any base revision exercise results in deletion of outdated/ unimportant items from the basket and inclusion of new items which were not in production when earlier IIP item basket was finalized.
  • The IIP series in India has been revised from time to time shifting the comparison base to a recent period, by reviewing the coverage of items and industries and by improving, as far as practicable, with a view to reflect adequately, the industrial growth and structure. When the index was commenced in India, the base year adopted was 1937 and this was revised successively to 1946, 1951, 1956, 1960, 1970, 1980-81 and 1993-94.

New IIP is a more dynamic index

  • New IIP series ( Index of Industrial Production) with a base year 2011-12 with an aim to map economic activities more accurately.
  • According to the recommendations of the working group for the development of the methodology of compilation of IIP, the new item basket for IIP will include 55 mining products and 809 manufacturing products that would be re-grouped into 521 item groups, treating electricity as a single product.
  • Currently, the IIP is calculated on base year of 2004-05

The change in baseline for the IIP is expected to bring in more accuracy in mapping the level of economic activity and calculating other numbers like national accounts.

  • Think tanks have been pitching for release of new time series of the IIP and the WPI so that GDP numbers can be based on more accurate and realistic data.
  • The retail inflation based on the consumer price index (CPI) is also calculated on the base year of 2011-12.
  • Naturally, the IIP growth acquired a certain directional bias, which impaired its usefulness. To overcome the weaknesses, the IIP is being made more dynamic.
  • First, the Central Statistics Office has updated its base year to 2011-12. The revision, the ninth such exercise since the original base year choice of 1937, is aimed at capturing the changes that have taken place in the industrial sector since 2004-05.
  • New products have been included in the items basket, and those that have lost their relevance deleted. Renewable energy, for example, has been included in the electricity index.
  • The expanded coverage — 809 items against 620 earlier, and a larger number of factories — is expected to make the IIP more representative.
  • Second, instead of the periodic baskets revisions, a permanent standing arrangement is being put in place to make sure that the IIP remains representative.
  • An ongoing process is to be instituted for monitoring and mapping into the index the changes taking place in the economy under which a technical committee will continuously review the item basket, the reporting entities and the method of coverage.
  • The improvements in the statistical apparatus have been carried out on the recommendations of a committee that the United Progressive Alliance (UPA) government had constituted in 2012 under the chairmanship of late Saumitra Chaudhuri, a member of the Economic Advisory Council of Prime Minister Manmohan Singh.
  • Several measuring difficulties remain, though. The process of physically collecting data from entities to establish the collection system, where no statutorily-mandated system of regularly reporting production is in place, is still an institutional challenge.

Righting the numbers

  • The updated IIP offers new insights, the most important being that India may have been overstating the industrial slowdown in its economy. Whereas the average industrial output growth of the last five years (2011-12 to 2016-17) in the old IIP is 1.38%, in the updated series it is 3.8%.
  • On the manufacturing front, the news gets even better. The average five-year growth has improved to 4.04% against 0.94% in the old IIP.
  • Although the average growth in two of the five years in which UPA-2 was in office outpaced that in the three years of the incumbent National Democratic Alliance (NDA) government’s tenure.
  • The performance — 4.2% versus 3.9% — challenges the narrative of the ‘policy paralysis’ characterising the dying years of Dr. Singh’s stint. It also tests the efficacy so far of Prime Minister Narendra Modi’s ‘Make in India’ initiative.
  • The bad news is that the output growth of the infrastructure and construction sector has slowed down from 5.7% in 2013-14 to 3.8% in 2016-17 despite the NDA government’s sustained push to the infrastructure sector, including through substantial increases in targeted public spending, in the last three years.
  • The updated IIP also shows a modest recovery in the capital goods sector, a barometer of the investment sentiment. From -3.6% in 2013-14, output growth in the sector improved to 1.9% in 2016-17.
  • The main driver of growth in the economy remains consumption. Consumer durables grew 6.2% and non-durables 9% in 2016-17. The Seventh Pay Commission award to Central government employees and pensioners last year seems to have spurred consumption.
  • The monthly figures have not been released, but the spurt could also have been triggered by hectic use of demonetised cash for acquiring consumer durables and non-durables.
  • Demonetisation’s debilitating impact on manufacturing is visible in the updated monthly IIP for 2016-17. The average output growth for the seven months from April to October was 6.8%, and for the five months from November to March 2.28%.
  • The IIP’s coverage by design is limited to the organised sector. The disruption in the unorganised sector is expected to get measured in the ASI.
  • The base years of all the major macroeconomic indicators, the Gross Domestic Product (GDP) and the Wholesale Price Index, are now aligned — 2011-12.
  • The revised IIP will be plugged into the GDP series. The revised GDP estimates are scheduled to be released on May 31.

Issue/concern in news

  • In the past few years, the month-on-month IIP has shown excessively low, and even negative growth, which subsequently turned out to be out of sync with the actual manufacturing output growth measured through the Annual Survey of Industries (ASI).
  • Index of Industrial Production (IIP) is a critical economic indicator, the aim of the IIP is to capture the direction and the trend of industrial production in the country, not the absolute value of industrial production. Its chief utility is as an early indicator of turning points in the economy. The IIP has been failing in serving this purpose.

Reasons for above concerns/issues

  • The major reason being that IIP was measuring industrial output using baskets of production items and producing entities that had remained unchanged since 2004-05.
  • Meaning – The standard procedure followed was that a list of items was constructed in the base year and for each item the producing entities were identified. This structure was frozen.
  • In simple words, the IIP index was constructed with the output figures received month over month from the baskets of items and entities fixed in the base year. (It did not consider new entities or changes)
  • I.e., if an entity shut down, its output fell to zero. But since the basket was frozen no new entity could be taken in place of the zero-output one.
  • For instance, say Calculators may fall out of use and more smartphones may be consumed. The IIP was not equipped to capture such changes in the economy.

The way ahead

1.Revised Base Year
Therefore, the Central Statistics Office (CSO), Ministry of Statistics and Programme Implementation revised the base year of Index of Industrial Production (IIP) and Wholesale Price Index (WPI) to 2011-12 base years, replacing the 2004-05 base years. Analysts believe that the new series will be able to capture the current state of affairs of the economy by replacing the old basket of goods with a contemporary one.

  • Currently the IIP and WPI take 2004-05 as base year, while the GDP and Consumer Price Index (CPI) 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.
  • The new base year has been selected keeping in view the base year of other macroeconomic indicators namely Gross Domestic Product (GDP), Consumer Price Index (CPI).
  • Several changes have been made in the new series of the IIP in order that new IIP is able to reflect the changes in the industrial sector in a more representative and robust manner.