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. The IIP numbers released every month in India. The IIP numbers, in India use 2004-05 as the base year for comparison.
The IIP describes changes of the volume of goods and services produced over time. Its main purpose is to provide a measure of the short term changes in the volume of industrial production over a given reference period.
The IIP figures are generally seen as an important but short-term indicator of whether industrial activity in a country has risen or dipped. The major advantage of the production index compared to other indicators is the combination of fast availability and detailed breakdown of activities.
The IIP is a Key indicator of economic performance in most of the developed and developing countries. Index numbers summarize past developments, facilitate forecasting of future trends and assist with evidence based policy decisions. In addition Index numbers facilitate international comparisons.
The data for the IIP estimate is supplied by 15 source agencies which include Department of Industrial Policy and Promotion, Indian Bureau of Mines, Central Statistical Organization and central Electricity Authority, among others. The Index of Industrial production is compiled and published monthly by the Central Statistics Office (CSO) with the time lag of six weeks from the reference month.
Weights are key elements in the construction of any index as they provide a measure of the relative importance of each index component. In the case of the IIP, weights reflect the relative importance of a product, product group or Industry within the overall scope of Industrial production. To arrive at the aggregate index figure, relative of the data for products, product groups or industries are multiplied by these weights to derive a weightage average aggregated index.
The manufacturing of food products reported to be the major contributor for the industrial value added (35.2%) of the country. Wearing apparels industry (19.8%) and non-metallic mineral products (7.8%) were in the second and third rank in sharing large contribution for the total value added of the industrial sector.
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 number suggests 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.
- If the IIP data comes out better than the market expectation the yield in the bond market shows an upward trend as it reduces expectation of rates cuts by RBI and vis-a-versa.