Decoding Index of Industrial Production


Index of Industrial Production is a very important economic indicator to gauge the industrial activity of an economy. It measures the status of production for the industrial sector of an economy in a given period of time, in comparison with a fixed reference point in the past. The base of IIP and the weights assigned to different sub-sectors with in are revised from time to time depending on the changes in the economic structure and to attach a meaning to the current dynamics . The current base is set to 2004-2005 and is revised from earlier base of 1993-94.

The IIP, numbers are released every month in India and generally seen as an important but short-term indicator of whether industrial activity in a country has risen or dipped. They are also regarded as the leading indicators for the estimation of the GDP of the country as they serve the basis of estimating how the growth in GDP would look like in coming quarters.

IIP numbers are divided and recorded under four main categories Basic goods (45.7% weight), Capital goods (8.8% weight), Intermediate goods (15.7% weight) and Consumer goods (29.8% weight). Consumer goods is further breaked down into Durables (8.5% weight of total index) and Non-durables (21.3% of total index weight). In India, IIP covers areas in mining, manufacturing and electricity, however as per UN statistics it should also include some other areas like Constructions, energy, gas etc.

Since, industrial activity contributes about a quarter of our GDP, this indicator is keenly followed by economists, markets and policymakers. A higher growth in industrial activity, reflected by movement in the index, will naturally lead to better growth for overall GDP. Neverthless, to say this further reflects on the sentiments of the stock markets and leads to changes in stock values depending on how IIP fairs. A continual contraction of IIP index will also put pressure on the RBI to relook its monetary policy, as in days of contraction, it will come out to possibly ease the interest rates to boost the GDP.


Health check of economy-Key Indicators

The recent economic turmoil in global economy in general and Euro crisis in particular, have led me to look in detail various economic indicators that can help understand where we are standing and where we are heading. This curiosity has helped me delve little deeper and list down various leading and lagging economic indicators, the study and tracking of which can help us understand better the economic world around.

What are economic indicators? Wikipedia says: An economic indicator (or business indicator) is a statistic about the economy. Economic indicators allow analysis of economic performance and predictions of future performance. One application of economic indicators is the study of business cycles.

Well theoretically, all indicators are divided as leading and lagging indicators, but various studies by eminent economists and the recent turmoil’s in global markets and failure of predictions by US Fed Chairman Ben Benarke have raised doubts over the efficacy of leading indicators. The gist, according to economist Pedro Amaral, is that most of the leading indicators don’t actually turn much in advance of a GDP downturn, and don’t have a ton of value. So, without going into much details of leading and lagging indicators, I am here by listing few of the very important economic indicators, track of which can help us manage our lives more better…

  •  IIP or Index of Industrial Production, in some countries it is published by name of PMI (Purchasing Managers Index) – Look for trends in growth of major segments like manufacturing, mining, electricity etc. Look out separately for trends in Capital goods index, intermediate goods and consumer durable and non durable
  • Stock Market Indices are good leading indicators as they reflect what general market is expecting in future of the state of economy and business. Look for stock market returns, volatility and outlook
  • GDP or Gross Domestic Product. Look for real GDP growth rates. Previous trend plus future outlook (forecasts)
  • Business Confidence Index
  • Growth in Infrastructure
  • Wholesale Price Index (WPI) – reflects inflation in economy, constitute of food articles, primary articles, all commodities.
  • GDP Deflator – ratio of nominal GDP to Real GDP
  • Fiscal Balance as % of GDP
  • Balance of Payment – Exports (% growth) – Imports (% growth), further dive into capital account and current account status and trends.
  • External Debt as % of GDP – look for ratios like Public Sector debt as % of GDP and Credit to GDP ratios
  • Consumer Confidence Index as well consumer spending trends
  • Residential Property Sales
  • Unemployment rate – look for unit labor cost, percentage change over previous periods, change in total labor force
  • Money supply – changes in narrow money and Broad money over previous periods
  • Bond yield curves – 3 month interest rates vs. 10 year govt. bonds
  • Income and wages trends in economy
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