Economics for Everyone - Indicators Of Economic Growth - Index of Industrial Production (IIP)
Prof. M. Guruprasad, Aicar Business School, Mumbai / 10:04 , Mar 15, 2011
In India, industrial classifications have for long been in use in the population census, industrial surveys, labour statistics, national income estimates, etc
CONTEXT 1:
RBI concerned over sharp fall in IIP numbers:
Reserve Bank Deputy Governor Subir Gokarn recently expressed concern over the sharp fall(August- September 2010) in factory output growth, saying the latest numbers are disconcerting.
CONTEXT 2:
Festive cheer makes Oct’10 IIP jump to 10.8%
India's industrial output grew at its fastest pace in three months in October beating economists' estimates and driving away, for now, concerns over a slowdown in economic activity.
CONTEXT 3 :
Output of six core industries up 7.1% in Jan, may push up IIP
The above information from news relating to IIP indicates the swing of IIP value from low end to a boom.
It is important to note that the RBI Deputy governor and the finance minister expressed their concerns on this issues. The low growth recorded by IIP in August 2010 was as unexpected and surprising because of the high growth witnessed in July 2010. Equally the case of growth rate in October 2010.
Let us understand some basics of IIP
Meaning:
Index of Industrial Production (IIP) is one of the Prime indicators of the economic development for the measurement of trend in the behavior of the Industrial Production over a period of time with reference to a chosen base year. Index of Industrial Production (IIP) in essence is an index which details out the growth of various sectors in an economy. It indicates the relative change of physical production in the field of industries during a specified year as compared to previous year. If the IIP is growing month-over-month for a particular industry, this is a sign that the companies in the industry are performing well. Investors can use the IIP of various industries to examine the growth in the respective industry.
Indian IIP consists of sectors like mining, electricity, Manufacturing & General. Index of Industrial Production (IIP) is a summary number, the magnitude of which represents the status of production in the industrial sector for a given period of time as compared to a reference period of time. Thus, 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, at present, use 1993-94 as the base year for comparison. For the base year the IIP would be equivalent to 100 Points.
The increasing importance of the Indian Economy has led to a need to Forecast the Performance of the of the Indian Economy. Monitoring of the Indian Economic Cycle and thus tracking the key economic indicators such as the IIP has become an important activity for the policy makers.
Method:
The IIP was first compiled and released using 1937 as the base year and included 15 industries. Subsequently, it has been updated both with regards to the base year as well as the nature of items included, to keep the data relevant. As the structure of the industrial sector changes over time, it became necessary to revise the base year of the IIP periodically to capture the changing composition of industrial production and emergence of new products and services so as to measure the real growth of industrial sector. The successive revised base years were 1937, 1946, 1951, 1956, 1960, 1970, 1980–81 and 1993-94.
While the items in the index are taken into consideration are classified into item groups under the three heads of mining, manufacturing and electricity, they have also been classified under use-based categories like basic goods, capital goods, intermediate goods, consumer durables and consumer non-durables. The other recent additions includes representations from the small scale and unorganised manufacturing sector. The latest series with 1993-94 as the base year containing 543 items. The revised series has followed the National Industrial Classification NIC-1987.
The index is computed using the weighted arithmetic mean of quantity relatives with weights being allotted to various items in proportion to value added by manufacture in the base year by using Laspeyre's formula:
I = ? (WiRi)/ ? Wi.
Where I is the index, Ri is the production relative of the ith item for the month in question and Wi is the weight allotted to it.
NoteErnst Louis Etienne Laspeyres ( November 28, 1834 – August 4, 1913) was Professor of economics and statistics (and public finance and administration).Laspeyres is mainly known today for his 1871 development of the index number formula method for determining price increases, used for calculating the rate of inflation. A type of this calculation is known today as the Laspeyres Index. In addition to his accomplishments in price indices, Laspeyres may be counted as one of the fathers of business administration as an academic-professional discipline in Germany, and as one of the main unifiers of economics and statistics.
The Central Statistical Organisation (CSO),[/b] of the Ministry of Statistics and Programme Implementation being nodal statistical authority is vested with the responsibility of setting up standards for collection, compilation and dissemination of statistical data. The official statistical data are required to be collected and presented according to classification designed to facilitate their use for national economic policy and for international comparison. Comparability of statistics available from various sources, on different aspects of the economy, and usability of such data for economic analysis are prerequisite for standardization of a system of classification. The data for the IIP estimate is also supplied by other source agencies which include Department of Industrial Policy and Promotion, Indian Bureau of Mines, and Central Electricity Authority, among others. The CSO took up the task of evolving a national industrial classification in early 1960 and invited suggestions from various concerned agencies of the Government of India such as Registrar General; Economic Advisers to the Ministries of Finance, Food & Agriculture, Commerce and Industry; Indian Bureau of Mines; National Employment Service; Labour Bureau; Planning Commission; National Sample Survey and Indian Statistical Institute etc.
Taking into account the suggestions received and keeping in view the requirements, the CSO drew up a draft National Industrial Classification called Standard Industrial Classification (SIC),[/b] which was subsequently finalized and released in 1962. To take care of the significant changes in the organization and structure of industries, the necessity to revise the industrial classification has been felt from time to time. With this objective, the CSO revised SIC 1962 in 1970 (NIC-70).After release of the United Nations International Standard Industrial Classification (ISIC) - 2002 Rev. 3.1, NIC-1998 was updated keeping consistent with ISIC Rev 3.1 and the updated version, namely NIC-2004 was adopted.
The National Industrial Classification (NIC)[/b] is an essential Statistical Standard for developing and maintaining comparable data base according to economic activities. Such classifications are frequently used in classifying the economically active population, statistics of industrial production and distribution, the different fields of labour statistics and other economic data such as national income. Comparability of statistics available from various sources, on different aspects of the economy, and usability of such data for economic analysis, are prerequisite for standardization of a system of classification.
International Scenario[/b]
The issue of standardization of industrial classification at the international level was deliberated in the First International Conference of Labour Statisticians (ICLS) as early as 1923, wherein International Labour Organisation (ILO) prepared a report summarizing the classifications in use in different countries and enunciating the principles concerning industrial classification. It recommended the classification of economic activity under three broad
categories viz.,
(I) primary production (agriculture and mining);
(II) secondary production (manufacturing and construction) ; and
(III) services (transport, commerce, administration, etc.)
In U.S.A the indicator used is IPI (Industrial Production Index). This economic indicator is released monthly by the Federal Reserve Board. The indicator measures the amount of output from the manufacturing, mining, electric and gas industries. The reference year for the index is 2002 and a level of 100. Production data is often received directly from the Bureau of Labor Statistics and trade associations, both on physical output and inputs used in the production process. Each individual index is calculated using the Fischer index formula. Investors can use the IPI of various industries to examine the growth in the respective industry.
In this context it is important to understand the concept of leading indicator.
Concept of Leading Indicator:[/b]
A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators are used to predict changes in the economy, but are not always accurate.
List of Leading Indicators
Trends in Gross Domestic Product (GDP): Contribution of Agriculture, Industry and Services
Purchasing Power Parity (PPP) Index, Fiscal Deficit ,Trends in Inflation Rate, Interest Rates
Credit Off-take, Balance of Payment, Foreign Exchange Reserves, Crude Oil Rates
Foreign Direct Investment (FDI) Trends, Rain fall Index, Stock market index ,Exchange Rate
[/list]
Savings/GDP Ratio, Human Development Index, Electric Power Generation
Trends in Gross Domestic Product (GDP): Contribution of Agriculture, Industry and Services
Purchasing Power Parity (PPP) Index, Balance of Payment
Now let us understand the reasons for the extreme swings
[/list]
CONTEXT1:[/b] RBI concerned over sharp fall in IIP numbers: [/b]
Sharp fall in factory output growth. According to experts the reasons are a lot of that deceleration is coming in from a sharp decline in capital goods.
CONTEXT 2:[/b] Festive cheer makes Oct’10 IIP jump to 10.8%[/b]
Festive cheer makes Oct IIP jump to 10.8%.The reason was that the e rebound to double-digit growth was spurred by religious festivals in October and November. The growth, measured by the index of industrial production (IIP), was powered by a robust 11.3% jump in manufacturing output as factories produced more consumer durables like cars, two-wheelers and television sets to feed the festival demand. Manufacturing output, which makes up about 80% of the overall industrial output, was at 10.8% in the year-ago month.
CONTEXT 3 :[/b] Output of six core industries up 7.1% in Jan, may push up IIP [/b]
The output of the six core infrastructure industries grew by a healthy 7.1 per cent in January, leading some economists to predict a positive impact on overall factory output during the month. The growth was mainly driven by the healthy performance of the crude oil, petroleum refinery products and electricity sectors, according to data released by the Industry Ministry today. The output of the six core industries -- crude oil, petroleum refinery products, coal, electricity, cement and finished steel -- grew by 9.8 per cent in January, 2010.
In India, industrial classifications have for long been in use in the population census, industrial surveys, labour statistics, national income estimates, etc. However, a wide variety of industrial classifications were used by the various organizations entrusted with the task of collection of statistical data in various censuses, surveys etc. and according to experts the need to evolve a common industrial classification which could be used by different agencies became extremely urgent.
- Prof. M. Guruprasad,
AICAR Business School, Mumbai.
Source: Govt.of India, Times of India[/i]
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