Saturday, November 17, 2012

Index of Industrial Production (IIP) - (Hindu News Analysis - 3)

IIP Numbers for Sept 2012 (as released in Nov 2012) was very disappointing. It contracted by 0.4% (y-o-y) primarily due to dismal performance in manufacturing sector. 
Read the full news here (12th Nov, The Hindu

News Analysis

For administrators, planners and policy makers in the Government, it is important to understand how the economy works at the macro level and what the status of the national economy at any given time is. Official measures of economic aggregates form the foundation for sound management of governmental functions and decision-making relating to the national economy, with information being the key factor deciding the quality of decisions.

Index Numbers 
Lets consider the industrial sector. There are several products and each product is measured in a definite unit. e.g. while production of clothes is expressed in meters(thousand meters or lakh meters), the production of coal is expressed in tonnes(Million tonnes, billion tonnes, etc.), the production of natural gas is expressed in cubic meters and the production of oil in litres(gallons, barrels, etc.). Individual indicators of production are expressed in different units and tell about that particular product of the economy. For an overall assessment of all the activities of the industrial sector or the entire economy, it is essential to combine the various individual indicators into a summary or composite measure, which is free of the units of measurement. 

An Index Number, is such a composite variable which measures the short-term changes in a variable or a group of variables during a particular period with reference to a chosen base period.

IIP is one such index. Other indexes are CPI, WPI etc

Index of Industrial Production - IIP 
The all India IIP is a composite indicator that measures the short-term changes in the volume of production of a representative basket of industrial products during a given period with respect to that in a chosen base period. IIP is a statistical device which enables us to arrive at a single representative figure to measure the general level of industrial activity in the economy
  • IIP is compiled and published monthly by the Central Statistics Office (CSO) with the time lag of six weeks from the reference month.

Click to enlarge picture
  • For IIP preparation we take data from following industries
    • Mining
    • Manufacturing
    • Electricity
IIP Composition

  • Data for IIP comes from following sources

[Note: If you remember IIP figures for Jan 2012. It was in news because the initial figure of 6.8% was later revised/correct to 1.1%. This revision was severely criticized by RBI, Finance Ministry etc. Later it was found that the culprit was (2) Directorate of Sugar, which had reported wrong sugar production volume.] 
  • IIP characteristics
    • For IIP we take a ratio of the volume of commodities produced within a specified group of industries in a given time period to the volume produced in the same group of industries in a specified base period (2004-05).
    • IIP numbers do not include Agriculture & Allied services and Services sector data. 
    • Industrial production in IIP refers to the outputs of all industrial activities within the boundary of the country. 
    • IIP is a composite/summary indicator which does not have any units.
    • Base period of IIP is revised on a regular basis. Current base period is 2004-05
      • Base period revision is necessary in order to capture the changes in the structure and composition of the industry over time due to technological changes, economic reforms and consumption pattern.
  • IIP Vs PMI (Purchasing Managers Index) 
    • IIP continues to be a very volatile measure making it difficult to draw any meaningful analysis from it. RBI Governor himself remarked that IIP data continues to be “analytically bewildering”.
    • IIP Data has not been very reliable
    • The PMI gained importance in India after the RBI began taking cognizance of it. Globally too, PMI is considered an important macroeconomic indicator.
With above understanding of IIP, lets now understand the IIP data as released by CSO. The notification can be accessed here.

So it says the indices of Industrial Production for the Mining, Manufacturing and Electricity sectors for the month of September 2012 stand at 114.8, 174.7 and 149.7 respectively, with the corresponding growth rates of 5.5%, (-)1.5% and 3.9% as compared to September 2011.
[Note: Observe there are no units to these indices. Also it is comparing with 1 year old data and hence its called year-on-year(y-o-y)]

Also, the General Index for the month of September 2012 stands at 163.6, which is 0.4% lower as compared to the level in the month of September 2011(when it was 164.6).

Other indexes produced by Govt. of India

Consumer Price Indices (CPI) measure changes over time in general level of prices of goods and services that households acquire for the purpose of consumption.

  • CPI numbers are widely used as a macroeconomic indicator of inflation
  • Tool by governments and central banks for inflation targeting and for monitoring price stability
  • Deflators in the national accounts (used in GDP/GNP calculations to distinguish b/w changes brought by price to that by physical output)
  • Indexing dearness allowance to employees for increase in prices
CPI Indices:
  • CPI(IW), CPI(AL), CPI(RL) – Compiled by Labour Bureau in the Ministry of Labour and Employment
  • CPI(UNME -Urban Non-Manual Employees) is complied by CSO (Min of Statistics & Prog. Implementation)
  • CPI is published monthly.
Wholesale Price Index (WPI) is published weekly by Office of the Economic Adviser (OAE) in the Ministry of Commerce & Industry.

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