Macroeconomics

IIP slump clouds growth picture: Nov 13, 2012

What is IIP?

IIP stands for Index for Industrial Production in India. Simply stated, it is an index used to measure the growth of different industrial sectors in India. The main sectors of focus are electricity, manufacturing and mining. The figures of IIP are decided on the basis of a reference year, which is called a base year. The value of the base year would be 100 points and all other monthly and yearly figures are established compared to this reference point. It measures the short term volume of production of a basket of industrial products compared to the chosen base period. The current base year for India's IIP is 2004-05. A use based classification of IIP includes categories like basic goods, capital goods, intermediate goods, consumer durables and non consumer durables.

Why is IIP data important? What are the factors affecting IIP data?

As explained above, IIP data measures the total production that happens in India for a particular period compared to the base year. The elicited information from this data is about the demand and supply side dynamics that happens in India, IIP representing the supply side dynamics. It also gives a bigger picture on the performance of the macro economy. Hence, an increase in the index indicates that the total production for that particular period has risen due to an increase in the demand. This implies that the consumption has increased, which indicates an increase in the domestic income. An increase in the domestic income leads to an increase in the national income and hence, overall the economy is doing well. The surplus from the production can be exported, which also adds to the national income.

When the IIP data shows a decline, it indicates a decrease in the total production, which might have been triggered due to factors like decline in demand, increase in inflation, interest rate, reduction in export etc. It indicates the kind of ordeal the economy is undergoing...