What Is Index of Industrial Production (IIP)?

IIP : Importance & Classification

Introduction

In our earlier article, we have seen Gross Domestic Product (GDP) is a measure of the complete activity in the Indian economy. There is an indicator known as Index of Industrial Production (IIP), which explicitly reflects the industrial activities in the Indian economy. Let us discuss what is Index of Industrial Production (IIP) in detail.

What Is Index of Industrial Production (IIP)?

• The Index of Industrial Production(IIP) is a combined indicator. It is expressed in the form of an index number that shows the performance of the different industrial sectors of the Indian economy.
• IIP is a composite indicator that measures the changes in the volume of production of a basket of industrial products during a given period with respect to the volume of production in a chosen base period. The base year for the IIP is 2011-12.
• Thus, IIP is a short-term measure of industrial growth till the outcomes from Annual Survey of Industries (ASI) and National Accounts Statistics such as GDP are available.
• In simple words IIP tells us how fast or slow the industrial production is growing in a country.
• IIP index is computed and published on a monthly basis by Central Statistics Office (CSO) of the Ministry of Statistics and Programme Implementation.

Base Year Value in IIP

• The base year for IIP is always given a value of 100.
• The base year of IIP has been revised to 2011-2012 (in the month of May)
• This has been done in order to bring the IIP data at par with GDP data (GDP base year has been revised to 2011-2012).

For Example: 

• Suppose the value of IIP in 2016 was 130.
• This means that there has been a 30% (130-100) increase in the industrial activities in India as compared to the industrial activities in 2011-2012.

Importance of IIP

• IIP also tells how a country is performing. A good increase in industrial production would certainly help in achieving good economic growth.
• It may also indicate the trends in the general demand of products in any sector or the overall economy and check whether we are on path of right growth.
• Investors can use the IIP of various industries to examine the growth in the respective industry. If the IIP is growing month-over-month for an industry, this is a sign that the companies in the industry are performing well.
• IIP is used by public agencies including the Government agencies/departments including Ministry of Finance, Reserve Bank of India etc. All-India IIP data is used for estimation of Gross Value Added for Manufacturing sector on quarterly basis.

Sector wise classification  of IIP  

The sector-wise classification of Indian IIP comprises of the following three broad sectors:

1. Mining
2. Manufacturing
3. Electricity

• The Number of item groups has been increased from 399 under 2004-05 series to 407 under the 2011-12 series. Each item group may contain several sub-industries.
• In the new base year (2011-12), these 407 item groups are divided into 3 sectors- Mining (1 item group), Manufacturing (405 item groups), Electricity (1 item group) with % weights of 14.37%, 77.63% and 7.99% respectively.

Use-based Classification of Industries under IIP

The use-based classification of IIP comprises of the following categories of representative goods:

1. Primary Goods: Mining, Electricity, Fuels and Fertilizers
2. Capital Goods : Machinery items
3. Intermediate Goods : yarns, chemicals, semi-finished steel items
4. Infrastructure/Construction Goods : paints, cement, cables, bricks and tiles, rail materials
5. Consumer Durables : garments, telephones, passenger vehicles
6. Consumer Non-Durables : food items, medicines, toiletries, etc.

Core Industries in IIP

• Eight core Industries comprise 40.27% of the weight of the items included in IIP. These industries are : Coal, Crude Oil, Natural Gas, Refinery Products, Fertilizers, Steel, Cement and Electricity
• Refinery products has the highest % weight among the core industries.

Summary

• Index of Industrial Production (IIP), explicitly reflects the industrial activities in the Indian economy. IIP, in essence, gives a measure of the performance of the industries during a given period in a chosen base period. Base year of IIP is 2011-12, where IIP is taken as 100.
• Indian IIP comprises 3 broad sectors (% weightage) : Mining(14.37%), Manufacturing(77.63%) and Electricity(7.99%)
• Some sectors may outperform other sectors on account of a variety of reasons, such as growth prospects, position in the business cycle, government policy, international factors, etc.