What is IIP and Why it is important? - A revision on Economics

The Quick Estimates (QE) of Index of Industrial Production (IIP) (with base
year 2004-05) for the month of May 2012 have been released by the Central Statistics Office of the Ministry of Statistics and Programme Implementation today (i.e.12.07.2012).  The gist of the press release is as follows:

        

The General index stands at 170.2 for the month of May, 2012, which is 2.4% higher compared to the level in the month of May, 2011.  The year on year growth stands at 0.8% for the period of April-May 2012-13 corresponding to the previous year.  The QE shows some of the important items with high positive growth during the current month over the same month in previous year includes “Telephone Instruments including Mobile Phone & Accessories - 22.8%, Air Conditioner (Room) - 30.0%,  Carbon Steel - 23.5%,  Plastic Machinery including Moulding Machinery - 49.6%, Conductor, Aluminium - 58.1%, CR Sheets - 30.1%, Steel Structures - 28.5%, Boilers -28.8%, Purified Terephthalic Acid - 23.3% and Aerated Water & Soft Drinks - 25.1%”.

Some of the other important items showing high negative growth are: ‘Cable, Rubber Insulated’ [(-) 66.6%], ‘Gems and Jewellery’ [(-) 23.4%], ‘Sugar’ [(-) 49.8%], ‘Vitamins’ [(-) 62.2%], ‘Furnace Oil’ [(-) 30.6%], ‘Colour TV Sets’ [(-) 25.9%], , ‘Colour TV Picture Tubes’ [(-) 87.6%], ‘Di Ammonium Phosphate (DAP)’ [(-) 46.9%], ‘Edible Hydrogenated Oil’ [(-) 42.7%], ‘Complex Grade Fertilizers’ [(-) 46.7%] and ‘Textile Machinery’ [(-) 30.5%]. (Source: CSO press release)

When I read the news suddenly 2 questions popped out of my mind they are what is IIP? Why it is important for an economy? Here is the answer for these questions with additional information of how it is compiled in INDIA.

What is IIP?         

The Index of Industrial Production (IIP) conveys the status of production in the industrial sector of an economy in a given period of time, in comparison with a fixed reference point in the past.

In simple words it is an index which details out the growth of various sectors in an economy. E.g. Indian IIP will focus on sectors like mining, electricity and manufacturing.

Importance of IIP

As IIP shows the status of industrial activity, you can find out if the industrial activity has increased, decreased or remained same. Today it is important because with the news of recession hovering over the horizon, better IIP figures indicate increase in industrial production. It makes investors and stock markets become more optimistic.

Computation of IIP

The first time IIP used the year 1937 as its reference point. It contained only 15 products. Since then, the criteria for the base year as well as the number of products have been revamped 8 times (recent is 2004-05).

They are segregated into 3 broad sections: manufacturing, mining and electricity. They are also classified on the basis of usage: capital goods, basic goods, non-basic goods, consumer durables and consumer non-durables.

At present, IIP is compiled using data received form 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. Currently IIP comprises of 682 items.