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.


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