What is IIP

So What is Index of Industrial Production (IIP)?

The Index of Industrial Production(IIP) is a combined indicator.

It is expressed in the form of an index number.This measures the short-term variations in the production volume of a basket of industrial goods during a particular time period with reference to a base time period.

Thus, IIP is a short-term measure of industrial growth till the outcomes from Annual Survey of Industries (ASI) and National Accounts Statistics such as GDP are available.

Base Year Value in IIP:

The base year for IIP is always given a value of 100.
The base year of IIP has been revised to 2011-2012 (in the month of May)
This has been done in order to bring the IIP data at par with GDP data(GDP base year has been revised to 2011-2012).
For Example: 

Suppose the value of IIP in 2016 was 140.

This means that there has been a 40%(140-100) increase in the industrial activities in India as compared to the industrial activities in 2011-2012.

Calculation of IIP:

• The compilation of IIP is carried out in multiple stages.
• Initially for the items.
• Then for the sub-groups groups and major groups.
• Finally for all the sectors combined.
• The items included in IIP are selected from the results of 3-digit level National Industrial Classification(NIC)-2008.
• The selection is done in such a way so as to ensure that all the selected items contribute to at least 80% of the output of each 3 digit group.
• Each item is given a relevant weight.
• Weights at the sectoral levels are computed by using the sectoral Gross Value Added(GVA) , the GVA figures are obtained from National Accounts Statistics with the base year 2011-2012.

IIP is calculated as a simple weighted arithmetic mean of production relatives by using Laspreye’s Formula:

IIP=Summation(Wi.Ri)/Summation(Wi)
Where : Ri= Production Relative of the i th item for the relevant month
Wi= Weight allotted to the ith item

Production Relative is calculated as:
Ri= Qi/Qo
Where: Qi= Quantity produced in the current year in the reference month
Qo= Quantity produced in the base year in the reference month

Impact on stock market:

• Decreased Consumer Spending will lead to lower demand.
• The producers will respond to this low demand situation by reducing their production.
• A low industrial production will result in lower corporate sales and profits.
• Thus a direct impact of weak IIP data is a sudden fall in stock prices.
• On the other hand, a strong IIP data will imply higher industrial production.
• This, in turn, will imply higher demand, which in turn will lead to higher corporate sales and to greater profits.
• Hence a direct impact of a strong IIP data will be a rise in the stock prices.
• A continuous fall in IIP may lead to many strong stocks being undervalued.
• This gives an individual an ideal opportunity to invest in strong companies at a lower price.
• .