Index of Industrial Production

The IIP figure released during the April - June quarter indicates that the industrial production has contracted by 1.8% as compared to the same quarter a year back. What is IIP and what is the implication of this contraction? Let’s get some insight into this. The IIP data or the Index of Industrial Production data has a direct co-relation to the stock market. Every month the stock markets wait with bated breath to hear the IIP numbers. These numbers decide the market movement.

IIP, the key tracker of industrial production

Just like the body temperature when measured, (in degrees Fahrenheit or degrees Centigrade) gives us an indication of the health of the person, in the same way, the IIP is the number denoting the condition of industrial production during a certain period. These figures are calculated in reference to the figures that existed in the past. Currently the base used for calculating IIP is 1993-1994.

Importance of IIP

IIP represents the state of health of the industry. If the IIP exhibits an increasing trend, it indicates that industrial production is steadily rising, thus indicating a healthy state of affairs for the economy. Under such conditions, one can expect a growth in the GDP. On the other hand, a decreasing trend of IIP indicates falling industrial production which becomes a cause for concern for economic growth.

Today it is important because with the news of recession hovering over the horizon, better IIP figures would bring in hope and optimism among investors and the stock market with regards to the state of the economy.

Its relation with stock markets

The optimism amongst the stock markets and investors may translate into the markets going up. This is because the markets expect that company profits are set to rise and thereby leading to the growth in the country’s GDP.

It could also lead to an improvement in the country’s economy, thus making it an attractive investment destination to foreign investors.

Computation of IIP

The first time IIP was used with the year 1937 as its reference point. It contained only 15 products. Since then, the criteria for the base year as well as the number of products have been revamped 7 times.

Currently, IIP uses 1993-94 as the reference year. The products included are the ones used on consistent basis and can comprise of small scale sector as well as unorganized production sector. They are segregated into 3 parts:

1. Manufacturing

2. Mining

3. Electricity

They are also classified on the basis of usage:

1. Capital goods

2. Basic goods

3. Non-basic goods

4. Consumer durables

5. Consumer non-durables

The numbers for IIP are released within 6 weeks after the end of the month. This data is collated from 15 different agencies like The Department of Industrial Policy and Promotion, Indian Bureau of Mines, Central Statistical Organization and Central Electricity Authority. But at times, the entire data may not be easily available.

Hence, some estimates are done to generate provisional data, which is then used to calculate provisional index. Once the actual data is available, this index is updated subsequently.

Though IIP does indicate the condition of the country’s economy, it should not be taken as the sole basis for investment. This is because some sectors may show higher performance on the basis of underlying speculative practices.

So one needs to ascertain the reasons behind an increase or decrease in IIP figures, before investing.

Disclaimer: The views expressed in this lesson are for information purposes only and do not construe to be any investment, legal or

taxation advice. The contents are topical in nature and held true at the time of creation of the lesson. This is not indicative of future

market trends, nor is Tata Asset Management Ltd. attempting to predict the same. Reprinting any part of this presentation will be at

your own risk. Tata Asset Management Ltd. will not be liable for the consequences of such action.

INTELLECT

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