How is the Index of Industrial Production (IIP) calculated?
How is the Index of Industrial Production (IIP) calculated?
The Index of Industrial Production (IIP) is a measure that tracks the performance and growth of the industrial sector in an economy. It covers sectors such as mining, manufacturing, and electricity. The IIP is calculated monthly and serves as an indicator of the short-term changes in industrial activity. Here's how the IIP is calculated:
1. Classification of Industries:
The industries considered in the IIP are classified into three broad sectors:
Manufacturing: This has the largest weight (about 77.63% in India’s IIP).
Mining: Contributes around 14.37%.
Electricity: Has a weight of around 7.99%.
The index considers the output of selected industries from these sectors. The total weight of all sectors is 100%.
2. Selection of Items:
The IIP tracks the production of a specific set of items from these industries. For India, this includes over 800 items from various industries.
These items are chosen based on their significance in the economy and the ease of obtaining data on their production.
3. Base Year:
The IIP is calculated relative to a base year. The base year acts as a reference point, and the current output of industries is compared to the output levels in that base year. The base year in India is currently 2011-12, but it can be revised periodically.
4. Weights of Sectors and Items:
Each sector and item within the IIP is assigned a weight based on its contribution to the overall industrial output. The weight represents the relative importance of that sector or item in the industrial economy.
The formula for the IIP is a weighted average of the production levels of the selected industries.
5. Formula for IIP Calculation:
6. Index for Each Sector:
Separate indices are calculated for the mining, manufacturing, and electricity sectors. These indices are then combined using their respective weights to calculate the overall IIP.
7. Monthly Data Collection:
Data on the production of selected items is collected from various sources, such as government departments, industry associations, and companies.
The IIP is released monthly by statistical agencies. In India, the Central Statistical Organisation (CSO) is responsible for compiling and publishing the IIP.
8. Seasonal Adjustments:
Since industrial production can vary due to seasonal factors (like holidays or festivals), the raw data may be seasonally adjusted to remove these effects and give a clearer picture of the underlying trend in industrial growth.
Example Calculation:
If in the base year, the output of a particular good was 100 units, and in the current period it is 110 units, then the index for that item would be 110.
This index is then multiplied by the weight of that item, and the weighted averages of all items are summed to produce the final IIP.
Importance of IIP:
The IIP is widely used by policymakers, economists, and businesses to assess the performance of the industrial sector and make decisions related to monetary policy, investment planning, and business strategy.
In summary, the IIP is calculated by aggregating the production data of a selected basket of industrial goods, weighting them according to their importance, and comparing them to a base year. It provides a clear indicator of the health of the industrial sector in the short term.
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