The latest figures released by the Indian government have highlighted a worrying trend in the country’s core industries. Eight key sectors experienced a contraction of 8.5% in August 2020 compared to the same month in the previous year. This means that these industries have now been shrinking for six consecutive months. The sectors impacted are coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity. Together, these industries make up over 40% of the Index of Industrial Production (IIP).
Understanding the Contraction
From April to August 2020, the combined growth of these core industries fell by 17.8%. Most notably, all but coal and fertilisers continued to see declines in production in August. After four months of contraction, coal production rose by 3.6% thanks to increased offtake levels. Offtake agreements – commitments by buyers to purchase a producer’s future goods – are a key factor in this sector.
The steepest decline was seen in refinery products, which fell by 19.1%. This was followed by cement and natural gas.
The Contributing Factors
Several factors played a role in this slump. Firstly, demand in the economy has been low. Additionally, availability of equipment needed to establish new production platforms has been hampered. Seasonal factors, as well as restrictions related to the Covid-19 lockdown, also contributed to the contraction.
The Role of the Index of Industrial Production
The Index of Industrial Production (IIP) provides an overview of growth rates across various industry groups within a set period. This index is compiled and published every month by the National Statistical Office (NSO), part of the Ministry of Statistics and Programme Implementation.
The IIP measures growth across broad sectors, including mining, manufacturing and electricity, as well as use-based sectors such as basic goods, capital goods and intermediate goods. The eight core industries make up around 40% of the items included in the IIP.
As per their weightage, the core industries are ranked as follows: Refinery Products (28.04%), Electricity (19.85%), Steel (17.92%), Coal (10.33%), Crude Oil (8.98%), Natural Gas (6.88%), Cement (5.37%) and Fertilizers (2.63%). The base year used for the IIP calculation is 2011-2012.
The Significance of IIP
The IIP provides insights into the physical volume of production across various sectors. This data is used by numerous government agencies, including the Ministry of Finance and the Reserve Bank of India, for policy-making purposes. Furthermore, the IIP is integral to the computation of the quarterly and advance Gross Domestic Product (GDP) estimates.
