Recent reports have revealed an unprecedented contraction in India’s Index of Industrial Production (IIP) for September 2019, compared to the same period in the previous year. The IIP measures the growth rates in different industry sectors over a fixed duration, and this is the first time since November 2012 that all broad-based sectors – Mining, Manufacturing, and Electricity – have reported a shrinkage. This is also the lowest monthly growth recorded in the 2011-12 base year series.
The Underlying Causes of the IIP Contraction
The contraction in the IIP can be attributed to a combination of factors which include slowing agricultural growth having a negative impact on rural demand, a slowdown in the Indian industrial sector, and a structural growth slowdown in the Indian economy.
- Lower agricultural growth: India is witnessing agricultural distress due to several reasons such as lack of easy credit, dwindling average size of farm holdings, poor policy and planning among others.
- Slowdown in the Indian industrial sector: The industrial sector in India is grappling with a slowdown driven by emerging disruptive technologies, shifting consumer behaviour and changing global industrial landscape.
- Structural growth slowdown: India is experiencing a deep-seated long-term economic slowdown, calling for major structural policies like those undertaken during the economic reforms of 1991.
Understanding the Index of Industrial Production (IIP)
Compiled and published monthly by the Central Statistical Organization (CSO), Ministry of Statistics and Programme Implementation, the IIP is an indicative measure of the growth rate of industry groups, segmented into:
- Broad sectors: Mining, Manufacturing, and Electricity.
- Use-based sectors: Basic Goods, Capital Goods, and Intermediate Goods.
The base year for the IIP is 2011-2012. IIP includes India’s eight core industries which account for about 40% of the weight of items.
Importance of IIP
Being the sole measure of the physical volume of production, IIP holds immense significance for various government agencies, including the Ministry of Finance, the Reserve Bank of India et al. It is extensively employed in policy-making and importantly remains extremely relevant for calculating quarterly and advance GDP estimates.
Key Facts Related to India’s IIP Contraction
| Fact | Description |
|---|---|
| Contraction in IIP | For the first time since November 2012, all broad sectors witnessed contraction, registering the lowest monthly growth in the 2011-12 base year series. |
| Primary Factors | Agricultural distress, industrial sector slowdown, long-term economic slowdown |
| Measure of IIP | Broad sectors (Mining, Manufacturing, Electricity), Use-based sectors (Basic Goods, Capital Goods, Intermediate Goods) |
| Significance of IIP | Determining physical volume of production, policy-making, calculation of GDP estimates. |
Need for policy implementation
In order to deal with this situation, the Indian government might need to launch significant structural policies similar to the economic reforms of 1991, which could help in surmounting the ongoing slowdown.