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All you wanted to know about... the New IIP Series

| Updated on: May 22, 2017
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There was a perception that the IIP (Index of industrial Production) data did not fully represent industrial trends. Moreover, IIP till recently used 2004-05 as the base year, while GDP and WPI (Wholesale Price Index) data have already moved to 2011-12 data series. It made comparison with GDP and inflation figures a tad difficult. So, the Government set up a committee to review the IIP and introduce a new data series with 2011-12 as the base year. The change was to capture structural changes in the economy and improve the quality of representativeness of the IIP.

What is it?

IIP is an important composite indicator that measures changes in the volume of production of a basket of industrial products. Changing the base-year per se shouldn’t make too much difference to the IIP growth figures. But what makes a difference is the constituent items of the index and weights assigned to each of them. As compared to 2004-05 series, many items were introduced or deleted in the 2011-12 series. For instance, refined palm oil, cement clinkers and surgical accessories were introduced. Gutka, tooth brushes, leather shoes, fans, calculators, pens and watches were deleted. In all, 149 new items were added in the new IIP 2011-12 data series, while 124 of them were deleted. At the broad level, the new series had 809 items from the manufacturing sector as against 620 from the old 2004-05 series.

Why is it important?

It is important for the IIP to reflect true industrial trends, which in turn has an impact on the policy decision-making. Take, for instance, the period before and after the introduction of demonetisation. One would have expected IIP growth figures to take a knock after demonetisation. But IIP growth using the 2004-05 series showed counter-intuitive trends. As against an average monthly growth of (0.3) per cent during the first seven months of 2016-17, there was a turnaround in the last five months of 2016-17 (2 per cent). However, using the new IIP data, growth fell from 6.3 per cent to 3.3 per cent during the post-demonetisation period.

The new IIP , moreover, correlates better with other indicators such as core sector output and PMI (Purchasing Managers Index) as compared to the old series. The better representation is a culmination of various changes that has been made in the construction of the index. Firstly, it has shuffled the list of items to better reflect the active industries. Secondly, it has introduced the concept of ‘Work-in-Progress(WIP)’ for capital goods, to avoid lumping of production figures. Among the other changes, renewable energy were included in the overall electricity production figures.

However, it’s not foolproof yet. It takes manufacturing data only from companies in the organised sector. However, in India, 75 percent of the manufacturing jobs come from the unorganized sector. Moreover, doubts remain as to how the Government will be able to source authentic data on WIP when most companies themselves compute WIP only on a quarterly basis.

Why should I care?

It’s a report card on the Government’s performance and a vital tool for policy makers. It also has a bearing on industrial policy making. IIP has a 75 percentage weightage for manufacturing. Moreover, a healthy IIP also bodes well for manufacturing jobs.

The bottomline

While its hard to figure why tooth brush is passe according to new series, it is a better representation of the industrial economy.

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Published on January 11, 2018

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