Revisiting India’s industrial barometer: Base year revision of IIP

Issue of industrial growth

In India, with brisk growth in services, the sector’s share in Gross Value Added (GVA) has doubled since the early 1950s, averaging 62.5% over the first half of this decade. Agriculture and allied activities, while still essential, now contribute to about 15% of the GVA. But industry, at around 22% of the GVA, leaves scope for improvement.

Initiatives like Make in India, Production Linked Incentive schemes, ease of doing business reforms, and industrial corridors, among others, are efforts to boost industrial growth. They have helped improve growth rates in each of the three sectors covered under the Index of Industrial Production (IIP) — mining, manufacturing, and electricity — in the post-Covid period, compared to before the pandemic. Recent GST rate cuts will further shore up consumption and support industrial recovery. Furthermore, developments related to deregulation, liberalisation and the emergence of new industries signal healthy dynamism.

Why revise base year

With a more market-oriented economy, the need for quick and symmetric information has grown. Therefore, the statistical systems must adapt to capture full and correct information of the economy. This is especially true for industry, which not only constitutes over a fifth of the economy’s output, but also has backward and forward linkages with other sectors.

The Ministry of Statistics and Programme Implementation (MoSPI) has been working on multiple fronts to ensure and improve data quality amid rapid changes. Towards this end, one of the steps was to constitute a Technical Advisory Committee for Base Year Revision of the All-India Index of Industrial Production (TAC-IIP).

Apart from the government and the Reserve Bank of India, numerous stakeholders, from businesses to financial analysts, use IIP data. The IIP is a crucial input for quarterly GVA, used in planning and research.

The compilation of IIP in India commenced with the base year 1937. To capture economic and technological shifts, it has undergone nine subsequent base year revisions. The TAC-IIP has now recommended a base year revision to 2022-23, in alignment with the new base year proposed for the GDP.

Note that the methodology for compiling the IIP is very much aligned with the International Recommendations for the Index of Industrial Production (IRIIP), 2010, with suitable adaptations to reflect national requirements and data availability.

Key improvements

The new series will incorporate updates to the product basket, improved data sources, and reworked sectoral weights. The following are some key improvements proposed:

Expansion of scope, coverage: Item-basket is being revised to capture obsolescence as well as innovations, by dispensing with several once-relevant products such as fluorescent tubes & CFLs, printing machinery, and kerosene, and capturing new-age products like laptops, vaccines, LED bulbs, and components of aircraft and spacecraft.

As per IRIIP guidelines, the IIP should cover sectors like Mining & Quarrying, Manufacturing, Electricity, Gas, Water Supply, and Waste Management. For the first time, the new IIP aims to cover minor minerals and gas supply with information captured from key producing states/ ministries.

Treatment of ‘not elsewhere classified’ items: The selection of the IIP item basket is based on the Annual Survey of Industries (ASI), and its classification codes. In this context, MoSPI has undertaken a mammoth exercise of identifying 276 “not elsewhere classified” items by revisiting relevant factories. The new index ensures that 95% of their weights are assigned to specific items, with only 5% redistributed, thus significantly enhancing information content.

Substitution of factories: So far, once a factory was included in the sample, it remained part of the index even if it ceased operations or changed its line of production. This often creates a problem when production items get replaced with newer near-substitutes.

To overcome these limitations, the new IIP series proposes to introduce a systematic methodology for substituting factories that have shut down or altered production lines. Replacement will be contingent on reliable data for at least 12 overlapping months for incoming and outgoing firms.

Seasonally-adjusted series: As always, the MoSPI wants to capture underlying trends and cycles in output for analytically meaningful forecasting. This is why the Ministry is working in collaboration with TAC-IIP towards putting in place a system to additionally provide a de-seasonalised IIP, in line with international practice.

The MoSPI is making sustained efforts to improve national statistics, the fruits of which will become increasingly clear over time. After discussion in the TAC-IIP, the lag in IIP has already been reduced. The integration of GST data with national statistics and greater digital adoption will be a game-changer.

In this context, the Ministry is treating the base year revision for the IIP as much more than a periodic statistical exercise.

Saurabh Garg is Secretary, MoSPI. Mridul Saggar is Professor at IIM Kozhikode and Chair of the TAC-IIP.

The views expressed are personal.