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Home / IAS Preparation / Index Of Industrial Production

Index of Industrial Production (IIP): Meaning, Significance & More | UPSC Notes

Last Updated on Sep 24, 2024
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The Central Statistical Organisation (CSO) has been responsible for compiling and publishing the Index of Industrial Production (IIP), since 1950. The Index of Industrial Production (IIP) is calculated as a simple weighted arithmetic mean of production relatives using Laspeyre's formula. It functions as a quantum index, expressing the production of items in physical terms. However, for certain items like machinery, machine tools, and shipbuilding, the unit of reporting is in value terms. In such cases, the monthly production value figures are initially adjusted by the Wholesale Price Index (WPI) of corresponding categories, released by the Office of the Economic Adviser, Ministry of Industry. While the United Nations Statistical Office (UNSO) recommends the IIP to encompass mining, manufacturing, construction, electricity, gas, and water supply, the IIP compiled in India excludes the construction, gas, and water supply sectors due to data availability constraints.

This article will help you understand the significance and structure of the Index of Industrial Production upsc. Study major topics of the Indian Economy from the perspective of UPSC Exams.

Latest Updates on the Index of Industrial Production IIP

As of July 2024, India's IIP is growing at a robust pace of 4.8 percent against the same period last year, which indicates that recovery continues in the country's manufacturing sector.

  • Sectoral Performance: Manufacturing has been a key growth engine for the whole IIP, and several sub-sectors are contributing significantly.
  • Infrastructure Commodities: Production of infrastructure commodities has risen significantly and follows the pattern of government investment in infrastructural development.
  • Consumer Durables: The production of consumer durables has also been on the rise, indicating increased expenditure on the demand side.

Learn more about the Aluminium Industry in India!

GS Paper

General Studies Paper III

Topics for UPSC Prelims

GDP, Major Industries in India, Factories Act of 1948, Index of Eight Core Industries

Topics for UPSC Mains

IIP vs GDP Indicators, Ministry of Statistics and Programme Implementation (MoSPI) Reports, Economic Survey Insights on Industrial Growth

What is the Index of Industrial Production (IIP)?

The Index of Industrial Production (IIP) is a measure of the rate of growth in the economy’s various industry groups over a given time period. The Central Statistical Organization (CSO) computes and publishes the IIP index on a monthly basis. The Index of Industrial Production, or IIP, is a measure of manufacturing activity in various sectors of an economy. The IIP figure compares industrial output for the current time, which is generally a month, to the reference period. IIP is a key economic indicator for the manufacturing sector. After the end of the reference month, the IIP index data is published six weeks later. Currently, the IIP index is calculated using 2011-2012 as the base year.

Background of IIP

Long before the first international guideline on the issue, India undertook the first formal attempt to compute the Index of Industrial Production India (IIP). In 1937, the Ministry of Commerce and Industry’s Office of the Economic Advisor attempted to compile and release IIP for the first time. It covered 15 major industries, accounting for more than 90% of total output in those industries. Since 1950, the all-India IIP has been published as a monthly series. The duty for the compilation and publishing of IIP was given to the Central Statistical Organization when it was established in 1951.

In India, the IIP series is updated on a regular basis. The comparison period has been shifted to a more recent period, and the coverage of items and industries has been reviewed. Furthermore, it has been improved to reflect industrial growth and structure as accurately as possible. When the index was first introduced in India, the base year was 1937, which was later revised to 1946, 1951, 1956, 1960, 1970, 1980-81, 1993-94, 2004-05, and most recently 2011-12.

Who Publishes Data on the Index of Industrial Production?

CSO compiles and publishes IIP data every month in the case of India’s Index of Industrial Production. The Ministry of Statistics and Programme Implementation (MoSPI) oversees the Central Statistical Organisation (CSO). The IIP index data will be available on the PIB website once it is released.

Components of IIP

The eight core industries make up about 40% of the weight of items of IIP. The core industries included in the Index of Industrial Production are electricity, refinery products, steel, crude oil, coal, natural gas, cement, and fertilizers. IIP constituents are divided into three broad categories: mining, manufacturing, and electricity.

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How is the Index of Industrial Production Calculated in India?

The Central Statistical Organisation (CSO) calculates IIP. It is published once a month, with a six-week gap between issues. IIP is calculated as the weighted average of all industrial activities’ production relatives. Formula for Index of Industrial Production: Laspeyres fixed base formula is used in mathematical calculation.

Also, check out the article on Exclusive Economic Zone Here!

Change in IIP Base year

In 2017, the base year was changed from 2004-05 to 2011-12. 1937, 1946, 1951, 1956, 1960, 1970, 1980-81, 1993-94, and 2004-05 were the previous base years.

The Relationship Between IIP and the Core Sector

The core sector is made up of the eight key sectors that make up the Indian economy: Coal, crude oil, fertilizers, steel, natural gas, refinery products, cement, and electricity are among the eight sectors.

  • The core sector, also known as Infrastructure output, refers to the basic industries that make up the economy’s foundation.
  • The core sector’s components must be subdivided further into sectors that can be directed by government policy and sectors that are more driven by demand.
  • Manufacturing accounts for more than 67 percent of overall Gross Domestic Product growth, so a stronger and more sustained increase in the IIP number is beneficial to the economy.
  • Positive GDP growth has typically been observed to be synchronised with positive IIP growth.
  • The core sector can be used as a predictor of a turnaround. When the core sector number rises, economic activity usually rises with it.
  • Cement, steel, and electricity are typically strong lead indicators for a recovery in economic growth.
  • These industries have a strong multiplier effect on growth, which is usually a good thing when it comes to reviving growth.

Also, learn about the Core Sector in India here!

Major Industries in the Index of Industrial Production

The table below represents the weightage of the eight major industries in IIP:

List of Major Industries in the Index of Industrial Production

Industry

Weight

Coal

10.33

Electricity

19.85

Crude oil

8.98

Cement

5.37

Natural gas

6.88

Steel

17.92

Refinery products

28.04

Fertilizers

2.63

Total

100

Also, check the List of Navratna Companies in India here.

Significance of the Index of Industrial Production (IIP)

If IIP data indicates that industrial activity is sluggish, the country’s central bank may refrain from cutting interest rates. On the other hand, if IIP data is higher, interest rates may remain stable.

IIP is important because it is used by government agencies such as the Ministry of Finance, the Reserve Bank of India, and others to make policy decisions. IIP is still very important for calculating GDP (Gross Domestic Product) estimates on a quarterly and advanced basis.

For a variety of reasons, IIP is regarded as critical information. For example, stock market analysts closely monitor data released after market hours to determine whether economic momentum is gaining traction. When the Reserve Bank of India formulates its monetary policy, the IIP is also a key indicator. However, one must admit that the CPI inflation data has become crucial for the Reserve Bank of India.

Also, check the article on the Fertilizer Industry in India here.

Difference Between the IIP & the Annual Survey of Industries (ASI)

The IIP is based on a set of items and factories that were chosen at the start of the period. The ASI, on the other hand, is a data-driven survey of factories registered under the Factories Act of 1948. The sampling frame and the sampled establishments both change dramatically here. As a result, the ASI captures new items and factory information, whereas the IIP does not.

Growth rates in IIP are calculated using production volume, whereas growth rates in ASI are calculated using Value Added. Furthermore, IIP establishments are generally larger in size, whereas ASI establishments include both large and small units. As a result, IIP growth rates are lower because smaller units with a thinner base grow faster (ASI). 

The manufacturing sector’s growth rates differ between the two datasets (IIP and ASI).

Also, check the article on the Coffee Industry in India here.

Conclusion

In this article, we analyze the structure of the Index of Industrial Production(IIP). We also tried to understand the significance of the Index of Industrial Production for India. Besides, we also analyzed the sections and features of the Index of Industrial Production.

Key Takeaways for UPSC Aspirants

  • Definition and Purpose: The Index of Industrial Production is a measure that quantifies the change in volumes of different sectors producing industries in India. It indirectly computes the exact volume change in the production and is regarded as an indicator of the level of healthiness of the economy.
  • Structural Components: IIP aggregates the sectors of manufacturing, mining, and electricity into more categories - primary goods, intermediate goods, consumer durables, and consumer non-durables.
  • Base year and data collection: The index takes a specific base year for comparison while keeping consistency and accuracy in measuring growth. Data is collected and compiled by the Central Statistical Office from the sources.
  • For Policymaking: Policymakers use this IIP data to formulate economic policies, identify trends and decide according to industrial development and growth strategies.
  • Monthly Release: The IIP is released monthly. This would elicit timely data on industrial performance. A higher monthly frequency will ensure any short-term change is monitored and readjusted on time.
  • Economic Indicator: IIP is an economic leading indicator. It enables economists to "predetermine" the growth in GDP as well as all other macro-economic parameters. Analysts draw close attention from economists who monitor the health of the economy.
  • Sectoral Analysis: IIP provides sectoral details about performance that can identify what sectors are doing well and what is not. Such sector-specific data can fuel policy efforts in the sectors concerned.
  • Challenges and Limitations: Though a very potent tool, IIP does have a challenge in the sense of collection delay and then subsequent revisions in these figures. Additionally, the unorganized sector lies beyond the purview of IIP. The methodology demands constant update and refinement in order to continue to be a relevant and authentic source of information.

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FAQs

The Index of Industrial Production (IIP) is a figure that depicts the growth rates of various industry groups in the economy over a given time period.

The Central Statistical Organisation (CSO) calculates and publishes the IIP index on a monthly basis.

Coal, crude oil, natural gas, petroleum refinery products, fertiliser, cement, steel, and electricity generation are the eight core industries covered. These eight industries account for 40.27 percent of the weight in the Index of Industrial Production's items.

The Central Statistical Organisation calculates IIP (CSO). IIP is calculated as the weighted average of all industrial activities' production relatives.

Iron and steel, petrochemicals, automobiles, textiles, jute, sugar, cement, paper, information technology (IT), and banking and insurance are the major industries in India's economy.

The IIP measures production growth, and its subcomponents are typically more important than the overall index. For instance, a recovery in the capital goods sector within the IIP has significant downstream growth externalities.
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