Posts tagged ‘IIP’

Index of Industrial Production – Calculation & Interpretation

Comparison of economic performance over time is a key factor in economic analysis and a fundamental requirement for policy-making. Short-term indicators play an important role in this context by providing such comparison indicators. Among these short-term indicators, the Index of Industrial Production (IIP) has historically been one of the most well known and well-used indicators. The IIP measures volume changes in the production of an economy, and therefore provides a measurement that is free of influences of price changes, making it an indicator of choice for many applications.

The all India IIP is a composite indicator that measures the short-term changes in the volume of production of a basket of industrial products during a given period with respect to that in a chosen base period. It is compiled and published monthly by the Central Statistics Office (CSO) with the time lag of six weeks from the reference month.

Sectoral Bifurcation (with 2004-2005 as base)

Sector Weight
Manufacturing 755.27
Mining 141.57
Electricity 103.16
Total 1000


Below is Use Based Bifurcation
 

 

Let’s look at below table and analyze how we say IIP is -1.80%, Manufacturing has fallen by 3.20%, etc, etc…

Above table was sectoral bifurcation. In the same way one can imagine use Based Bifurcation.

Total number of IIP for June 2012 is 168.3 whereas in 2011 it was 171.4, this shows that IIP has fallen 1.80%. In the same manner one can compute individual sectoral results. We also hear that “Manufacturing Number may be negative due to base effect”, now lets understand this with example. General IIP number in May-11 was 166.2. This shot up significantly in June-2011, which again receded to 167.2 in next month. Now what happened here is General IIP number for June-11 has created a base effect for next year same month. So probably growth may turn negative or analyst may expect low number because base (171.4) is pretty high.Source: Mospi

What IIP Signifies?

  • Low IIP suggests slow growth which in turn is detrimental to overall GDP Growth.
  • Low Manufacturing Data suggests businesses are either finding it difficult to increase production or they are simply pushing back major expansion. This could mean fewer jobs going forward.
  • Low Capital Goods (I haven’t included use based bifurcation) number suggest that companies are just not buying new equipment. Capital goods are basically machines and equipment used in the production of goods.  A negative number means that output of such machines is well below the baseline used for the series, and a clear pointer that companies are not interested in increasing their output until they see a change in the economic environment.
  • Consumer durables normally splurge during festive seasons.

There has been criticism as well for accuracy of the data.

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